Provisional liquidation

In Australia provisional liquidation is regulated by section 472(2) of Corporations Act 2001.[10] In Australia provisional liquidators must be licensed insolvency practitioners.[2]

Under British Virgin Islands law provisional liquidation is regulated by section 170(4) of the Insolvency Act 2003.[11] In Akai Holdings Limited v Brinlow Investments Limited[12] it was held that an applicant would need to show four things:

1. a petition before the court for the appointment of a liquidator;
2. a good arguable case that a ground for the appointment of a liquidator exists;
3. a good arguable case that the applicant has the necessary standing; and
4. that the court should exercise its discretion to maintain the status quo in relation to the company’s assets.

In Canada provision liquidation is regulated under section 28 of the Winding-up and Restructuring Act (R.S.C., 1985, c. W-11).[13]

In the Cayman Islands, provisional liquidation is principally regulated by section 104(3) of the Companies Law (2013) Revision. One unusual feature of provisional liquidation in Cayman is that it is possible to appoint a provisional liquidator and still allow the directors to retain their powers of management.[14] This in part facilitates a slightly unusual use of provisional liquidation in the Cayman Islands as part of a debtor in possession corporate rehabilitation process. The company itself will apply for an order for provisional liquidation, and provisional liquidators are appointed which effectively creates a stay on the claims of unsecured creditors. The board of directors can then use that "breathing space" to try and implement a restructuring of the company's debts pursuant to a scheme of arrangement, or pursuant to an international restructuring process in the courts of another jurisdictions.[15] This approach has not been rejected in the courts of other jurisdictions (such as Hong Kong),[16] but accepted in others.[17]

In Hong Kong, there are three types of provisional liquidators.[18] There are "traditional" provisional liquidators, appointed under section 193 of the Hong Kong Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32); there are also provisional liquidators appointed pursuant to a members' voluntary liquidation under section 228A of the Ordinance, and there are "Panel T" appointments under section 194(1A) of the Ordinance whereby the Official Receiver is appointed as provisional liquidator.

Since the decision in the Legend case in 2006[19] provisional liquidation may not be used as a means of shielding the company from creditor's claims to facilitate a restructuring in Hong Kong,[16] although prior to that date the practice was relatively common.[18]

In South Africa, "provisional liquidation" has a very different meaning. When a creditor or other person applies to the court for the liquidation of a business, then the order is first made a provisional basis, and then subsequent confirmed (or not) at a full hearing, much like a decree nisi and a decree absolut in other jurisdictions.[20]

In the United Kingdom the power to appoint a provisional liquidator is found in section 135(1), of the Insolvency Act 1986, and it is regarded as an "emergency procedure".[1] The categories of persons who may apply for the appointment are set out at rule 4.25(1) of the Insolvency Rules 1986.[21] Under English law, all provisional liquidators are required to be licensed insolvency practitioners.[22] If upon the application for the appointment of a liquidator, there are concerns about potential dissipation of assets or misconduct on the part of the directors, then the court may order the appointment of a provisional liquidator.[1] Provisional liquidation is essentially an "emergency procedure". A provisional liquidator may only be appointed by the court only after a winding-up petition has been presented[23] The main reason for appointing a provisional liquidator is normally to preserve the company's assets. In practice most instances of applications for a provisional liquidator involve some kind of fraud or other misconduct.[3] The applicant will normally need to show that (a) it is likely that a winding-up order will be made at the hearing of the petition; and (b) the company's assets are at risk prior to the hearing of the petition (which includes either dissipation of the company's assets, or the potential loss or destruction of the company's books and records.[24] Accordingly, it will normally be necessary to establish either (or both) that: (a) the company is clearly insolvent, and it is likely that a winding-up order will be made at the hearing of the petition; and/or (b) there has been the type of misconduct that would justify a just and equitable winding-up. An appointment of a provisional liquidator may also be made where it is in the public interest.[25]

Because of the emergency nature of the remedy applications for provisional liquidation are very often made urgently and without giving notice to the company. In such cases, the applicant is under a legal obligation to give full and frank disclosure to the court of all material facts, including facts which are adverse to the applicant's own case. The applicant will also normally be required to give an undertaking in damages in the event the court subsequently determines that the order should not have been made to compensate the company for any damage caused to it by the appointment.[7]

If a provisional liquidator is appointed then the powers of the company's directors are effectively terminated, and the board will retain only a residual power to apply to dismiss or resist the winding-up petition.[26] The appointment of a provisional liquidator comes to an end when:[1]

1. a liquidator is appointed at a full hearing;
2. the provisional liquidator is discharged by order of the court; or
3. the underlying winding up petition is dismissed.