What is provisional liquidation, and how can it affect your business?

woman at laptopCarl Faulds explains the emergency procedure of provisional liquidation.

In simple terms, provisional liquidation is an emergency procedure governed by the Insolvency Act 1986 and Insolvency (England and Wales) Rules 2016.

When a winding up petition is presented against a company, the court can appoint a provisional liquidator where there is concern that the company’s affairs will not be conducted in the public interest, or its assets spirited away, before the business is wound up. In other words, the aim is to preserve its assets to maximise payments to creditors.

How can provisional liquidation be instituted?

Once the winding up petition has been presented at court, any creditor (including the creditor who initiated the petition), a contributory, or any director of the failing business, may apply for the appointment of a provisional liquidator. Many applications are made by the  Department for Business, Innovation and Skills or by HMRC.

Evidence will need to be shown that the company’s assets are in immediate jeopardy, or that its financial records are likely to be destroyed prior to winding up.

In most cases, the applicant will be required to give a cross-undertaking to compensate the company for any losses incurred by the appointment, should the winding up petition be subsequently dismissed.

What does a provisional liquidator do?

In general, a provisional liquidator does not realise the assets of the company or take any steps to wind it up, instead concentrating on the preservation of its assets.

In particular, the provisional liquidator may investigate whether any of its property has been misappropriated, or whether business has been conducted illegally. It is likely that members of the Public Interest Unit will inspect the company’s premises on the same day that the provisional order is made and will remove all its property.

Should the petition subsequently be dismissed, the business will be reinstated to the control of its directors and all property will be returned to the premises, while any assets seized will be released.

When is the provisional liquidator dismissed?

The appointment can be terminated by the provisional liquidator himself, or following an application by any interested party.

What happens if I’m owed money by a company that has gone into provisional liquidation?

If you have paid for the company’s good and services using a credit card, you can simply contact your card company and request a refund under Section 75 of the Consumer Credit Act 1974.

However, if you paid using a cheque, bank transfer or some other means, you will become an unsecured creditor when the winding up takes place, unless you have security for the debt, or can identify the goods as yours..

How much you receive will depend on what assets and liabilities the company has, including the extent of secured creditors, who will be ahead of you in the queue.

Nonetheless, the appointment of the provisional liquidator will prevent the company’s directors from hiding or dissipating its assets, which in turn may increase the return for creditors from a subsequent winding up.

About the author

Carl Faulds is managing director of insolvency company Portland and cash flow solutions provider Cashsolv

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