Provisional Liquidation

All section references relate to the Corporations Act, 2001.

WHAT IS A PROVISIONAL LIQUIDATION?

A Provisional Liquidation occurs by an order of the Court upon the application of either a creditor, director, shareholder, or some other party who has a vested interest in the company's affairs.

Such an order is generally made by the Court in circumstances where there is a winding up application in process and there is a real or perceived concern that either:

  • assets of the company may be lost, removed or otherwise dissipated, or
  • the company's business may be adversely affected or the value of the business reduced.

Because the purpose of a Provisional Liquidation is not to immediately wind up the company's affairs, generally the assets of the company will not be disposed of during a Provisional Liquidation, but instead the Provisional Liquidator's responsibility is to keep the status-quo.

WHAT HAPPENS ON THE APPOINTMENT OF A PROVISIONAL LIQUIDATOR?

A Provisional Liquidator's role is to secure the assets of the company and investigate the company's affairs in order to determine whether the company is solvent or insolvent. To do this, the Provisional Liquidator will ascertain the assets and liabilities of the company.

Once those investigations are complete, the Provisional Liquidator must reach a conclusion as to whether the company is solvent and therefore can trade out of Provisional Liquidation, or whether it is insolvent, in which case the company will be placed into Liquidation.

The Provisional Liquidator will then provide a report to the Court recommending whether the company should be released from Provisional Liquidation or placed into Liquidation.

This process usually takes at least one month.

If the Provisional Liquidator concludes that the company is solvent and the Court agrees, then a strategy will be put in place to ensure that the company is returned to the control of the directors with as little business interruption as possible.

If the Provisional Liquidator concludes that the company is insolvent and the Court agrees, then the company will be placed into Liquidation. In these circumstances, the winding up of the company's affairs will commence.

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