What is Provisional Liquidation?

Provisional liquidation is a process under the Corporations Act 2001 (Cth) where a company is placed into a temporary form of liquidation by court order. A provisional liquidator is appointed to safeguard the company’s assets and investigate its affairs pending the outcome of the winding-up application.

Unlike standard liquidation, provisional liquidation is not a permanent process. It is a temporary measure designed to preserve the company’s value while the court considers whether the company should be wound up or allowed to continue operating.

Circumstances Where Provisional Liquidation May Be Used

A small to medium-sized business might find itself subject to provisional liquidation in the following situations:

1. Urgent Need to Preserve Assets

• • Risk of Asset Dissipation: The company’s directors or related parties are suspected of stripping assets, transferring funds offshore, or engaging in transactions that could reduce creditor recoveries.
  • Fraud or Mismanagement: Evidence of fraudulent activity or severe mismanagement, where leaving the company under its current control would jeopardise its remaining assets.

2. Disputes Among Stakeholders

• • Deadlocked Directors or Shareholders: For example, two shareholders in a 50-50 company are in a deadlock, and one party applies to the court to resolve the issue.
  • Internal Disputes Affecting Operations: Disputes that create a risk of financial or reputational damage, requiring an independent party to step in.

3. Creditor Protection

• • Creditor Concern: Creditors believe the company is trading while insolvent and seek provisional liquidation to stop further losses or debts from accruing.
  • Priority Recovery: Ensuring that the company’s assets are secured and properly managed to maximise creditor returns.

4. Pending Investigation

• • Unclear Financial Position: The company’s financial records are incomplete or unreliable, requiring investigation by a provisional liquidator to determine whether the company is solvent or insolvent.
  • Suspicious Activities: Allegations of improper related-party transactions or breaches of directors’ duties that need independent review.

5. Safeguarding Public Interest

• • For instance, if a small construction company defaults on a government contract or a medium-sized business in a regulated industry (e.g., child care) is facing allegations of misconduct.

Example in Practice

Scenario: Hospitality Business

• A medium-sized hospitality company operating multiple cafes in Sydney is embroiled in a dispute between two business partners, and creditors are concerned that assets may be sold below market value to related parties.
• A creditor applies for a winding-up order but also seeks provisional liquidation to ensure that assets, including equipment, leases, and brand goodwill, are preserved until the court decides on the winding-up application.

Outcome:

The court appoints a provisional liquidator to take control of the company, secure the assets, and provide a detailed report. If the court decides the company cannot be rescued, the provisional liquidator transitions to full liquidation.

When Not to Use Provisional Liquidation

Viable Turnaround Options

If the company can restructure or refinance (e.g., under Small Business Restructuring or Voluntary Administration), provisional liquidation may not be necessary.

Low Asset Base

If the company has insufficient assets to fund the provisional liquidation process, creditors may explore less costly alternatives like a statutory demand or negotiation.

Qualifications of a Provisional Liquidator

A provisional liquidator must:

• Be a registered liquidator (like David Levi) under Australian law, meeting strict professional and ethical standards.
• Have no conflicts of interest or prior close association with the company or its directors.
• Possess the skills and experience to manage complex financial and operational matters, including securing assets, investigating records, and reporting to the court.

Provisional liquidators are subject to rigorous oversight, ensuring they act impartially and in accordance with the Corporations Act 2001 (Cth) and tailored Orders of the Court.

How Levi Consulting can help

At Levi Consulting, we understand the complexities businesses face when provisional liquidation becomes necessary. With extensive experience in insolvency, we assist businesses, creditors, and stakeholders in navigating the process efficiently. David Levi is a Registered Liquidator and can act as a Provisional Liquidator, Administrator, or Liquidator.

Reach out via DM or call David on 0418 602 466 for a confidential discussion on any issues, whether you are a director, accountant, or lawyer.