What is provisional liquidation and how can it be used to protect creditors’ interests?

Provisional liquidation is a mechanism available to creditors or members of a company in Australia which is derived from section 472(2) of the Corporations Act 2001 (Cth) (the Act).

An application to appoint a provisional liquidator can be filed any time after the filing of a winding up application and before the making of a winding up order usually in circumstances where there are one of the following factors present:

1. Where there is an urgent need to protect company assets at risk of being dissipated or
2. It is in the interest of creditors, members or in the public interest for the court to exercise its discretion to appoint a provisional liquidator.

The onus is on the applicants to establish the relevant grounds for the application and to demonstrate that it is in the interest of the company’s creditors or members, or in the public interest for the court to exercise its discretion and appoint provisional liquidators.

An application to appoint a provisional liquidator may, in the case that there is a real risk of assets being dissipated, be made “ex parte” or without notice to any other interested parties, provided the applicant makes full and frank disclosure of all relevant matters to the court.

Once served, and assuming the application hasn’t been made on an ex parte basis, a hearing date will be set down at which the directors and/or company will have the opportunity to oppose an application to appoint a provisional liquidator.

Common grounds that are relied upon in opposing an application can include the following:

• the company is able to rebut any presumption of insolvency relied on because it can pay its debts as and when they fall due and is not insolvent.
• the company is able to prove it is solvent and there is a genuine dispute about the debt claimed.
• the application process is defective on some level, and
• there are no assets of the company at risk of dissipation sufficient to justify appointing a provisional liquidator.

If the company’s opposition to the application is successful, the application may be dismissed by the court.

Should the applicant be successful in their application, a registered liquidator may be appointed as the provisional liquidator of the company.

Once appointed, subject to any additional powers being provided for in the appointment orders, the provisional liquidator’s role is to take control of the assets and/or business of the company and preserve those assets until such time as the winding up hearing can be determined.