In his latest Coffee Break Briefing, Partner & Head of Insolvency & Restructuring, Malcolm Niekirk provides spoke about provisional liquidations.
In this session, Malcolm outlines companies in a contingent state (in the time between presentation of a petition and the date of a winding up order), powers of provisional liquidators, uses for provisional liquidations and why there are so few.
You can find a short summary below or watch the video back in full.
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This was a general overview, to summarise the issues that insolvency practitioners might want to think about, in cases where a provisional liquidation might be a viable option.
Companies in a contingent state
There is a gap, usually of several weeks, between the date on which a winding-up petition is presented and the date on which the winding up order is made. However, when the court makes a winding up order, the compulsory liquidation is treated as backdated to the earlier date of the petition. This works a bit like time being reversed, and puts the company in a contingent state, from the moment when the winding-up petition is presented.
This contingent state (when a winder is running against a company) can have an effect on:
- Litigation;
- Enforcement by creditors;
- Property dispositions; and
- The directors’ powers.
Litigation
Whilst the winding-up petition is running against the company the court has the power to stay any litigation which is running against the company.
Creditor enforcement
Creditor enforcement is void from the commencement of the liquidation (the date of the petition, if a winding up order is made).
Property dispositions
Property dispositions are also void from the commencement of the liquidation (the date of the petition, if a winding up order is made).
Directors’ powers
The powers of directors remain until the date of the winding up order. While the petition is running the directors keep their powers.
Powers of provisional liquidators
When can you appoint a provisional liquidator?
The court may ‘appoint a liquidator provisionally’ after a petition is presented and before a winding up order is made.
Who can be appointed as a provisional liquidator?
The court may appoint the official receiver or any other ‘fit person’ as the provisional liquidator. Thus, insolvency practitioners can be provisional liquidators.
What powers does a provisional liquidator have?
Provisional liquidators have no statutory powers, only the powers conferred on them by the court. It’s important to draft that court order carefully.
Why appoint a provisional liquidator?
The main reasons for appointing a provisional liquidator are to limit the directors’ powers and to preserve the company’s property.
Uses for provisional liquidations
Some of the uses for provisional liquidations are:
To preserve the company’s assets
Normally a company will cease trading before the winding-up order is made. Whereas a provisional liquidation can allow trade to continue for an orderly winding up. Or a provisional liquidator can take control of the company’s assets and prevent the directors from misappropriating them.
Preserve the company’s records
A provisional liquidator may take control of the company records to preserve them. For example, if fraud is suspected, this might be very important.
Insurance company insolvency
Provisional liquidations used to be the only option for an insolvent insurance company. Administration has now become another option.
However provisional liquidations can still provide some advantages, for example dealing with exchange rate risks. Provisional liquidations typically offer useful moratorium protection, leading into a scheme of arrangement or restructuring plan.
A powerful ‘first strike’ in litigation
Provisional liquidations allow a creditor to take control of the debtor. Once appointed, the provisional liquidator can also seek freezing orders, on behalf of the company, for better protection of assets. Provisional liquidation is a high risk approach. It can be expensive to put right if the court later dismisses the winding-up petition.
Why are there so few provisional liquidations?
Some of the reasons why there are so few provisional liquidations is that:
- They are risky as orders may be refused or even discharged
- They are expensive, so suit valuable cases best
- They need inside information
- Other procedures may work well enough
Thanks for reading this short summary. You can watch the full, detailed webinar here.
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