Provisional liquidation: the court’s emergency brake

Where a company’s assets are at risk of disappearing before a winding-up petition is heard, creditors and other stakeholders can ask the court to appoint a provisional liquidator under section 135 of the Insolvency Act 1986 (the Act).

Most provisional liquidation appointments arise from a concern that a company’s assets will be dissipated by its directors between the presentation of a winding-up petition and the making of a winding-up order.

The court may make the appointment at any time after a winding-up petition has been presented and before a winding-up order is made. Either the official receiver or a licensed insolvency practitioner may be appointed as provisional liquidator.

The consequences for the company are serious, and the process remains one of the most powerful insolvency remedies in the court’s armoury. The directors’ powers pass to the provisional liquidator and, while the appointment remains in place, the company’s directors will have little influence over its affairs.

Who can apply for a provisional liquidation?

An application is made in support of an existing winding-up petition. The most common applicants are:

• Creditors, who are the predominant applicants under this procedure where assets are at risk
• Shareholders (contributories), where directors are acting improperly or have a significant conflict of interest
• The company itself, for example to protect directors from wrongful trading risk, though this is quite uncommon
• The Secretary of State and regulators, such as the Financial Conduct Authority, usually on public interest grounds.

The applicant must file a witness statement setting out the grounds for the application. This usually covers evidence of the company’s insolvency, the likelihood of a winding-up order being granted and what knowledge the applicant has concerning risk to its assets.

Applications often centre on the need to preserve company assets from the risk of dissipation by directors or to halt activities contrary to the public interest.

Risk of dissipation and the urgent need for insolvency management

The most frequent reason for an appointment is the risk that assets will be dissipated, or books and records destroyed, before the petition is heard.

In those circumstances, the court may place control of the company in the hands of an independent insolvency practitioner. The provisional liquidator’s role is generally to secure and preserve assets and records and to investigate, rather than to realise assets, although the order sets the precise powers afforded to the provisional liquidator.

Speed is often essential, meaning the application is normally listed for hearing on an urgent basis and often heard within a matter of days.

Basis for appointing a provisional liquidator

Broadly, an applicant must show that:

• The court has jurisdiction over the company, which includes companies registered in England and Wales, as well as foreign companies that can be wound up as unregistered companies under section 220 of the Act
• A winding-up order is likely to be made on the petition
• There is an additional reason for an appointment, such as a risk of dissipation, a threat to the integrity of the company’s books and records, illegal activity, public interest concerns or an urgent need for insolvency management.

Because an appointment may irreparably damage the business, intervention must be necessary and proportionate. Applicants should also be prepared to give a cross-undertaking in damages and, on a without-notice application, to make full and frank disclosure.

How does provisional liquidation come to an end?

In practical terms, a provisional liquidation can be viewed as a prelude to formal liquidation.

Assuming a winding-up order is made following the appointment of a provisional liquidator, it is usual for the provisional liquidator to then be appointed as the liquidator in the compulsory liquidation. They will have undertaken the initial investigations and have unparalleled insight into the company’s affairs at that time.

Alternatively, the court can terminate the appointment. Where the underlying petition is dismissed by the court, the provisional liquidation will end with the dismissal of the petition.

Conclusion

Provisional liquidation is a powerful but exceptional remedy.

It can preserve assets, protect records and expose wrongdoing at a stage when delay could be fatal to creditors’ recoveries. The investigations that follow can also have serious consequences for directors, including personal liability, disqualification and, where fraud is uncovered, a criminal investigation.

Applicants need clear evidence and the ability to act quickly. Companies and directors facing an application should consider their position promptly and seek appropriate advice.