Topic 3 – Provisional

Introduction  After the filing of an application for winding up and while it is pending, the may find that the assets and affairs of the company are in jeopardy and are being dealt with to avoid the consequences of liquidation.  and members would be disadvantaged if the company were eventually wound up: VR Dye & Co v Peninsula Hotels Pty Ltd [1999].  The court therefore has the power, pursuant to the CA, s 472(2), to appoint a provisional of a company at any time after the filing of a winding up application and before the making of a winding up order.  Gives interim control of the company to a liquidator; o It is interim because the control is given until the final determination of the winding up application.  The company’s financial position will be examined in its entirety: Constantinidis v JGL Trading Pty Ltd (1995).  While is a significant and useful remedy in particular circumstances, it is in fact rarely used.  Provisional liquidation compares with the application by a creditor for an order of interim control of a ’s property under s 50 of the BA.  Where ASIC is conducting an investigation of a company it is possible to obtain both orders appointing provisional liquidators and asset preservation orders under s 1323 of the CA: ASIC v Oceanic Asset Mnagement Pty Ltd [2015].

Who can apply?

Creditor  A creditor will be the applicant for an order, in most cases, initially the creditor will need to establish its standing as such. o Generally, it will be the creditor who has sought the winding up of the company and who is concerned that the directors are disposing of the company’s assets in order to avoid the consequences of liquidation.  E.g., where the directors have given guarantees to creditors in respect of the company’s liability and they seek to satisfy the claims to those creditors in preference to the claims of other creditors.

Member  May seek the appointment of provisional liquidator, e.g., where they are concerned that directors are acting improperly or recklessly and consequently wasting assets.  Occurred in Re JN Taylor Holdings Ltd (1991) in which a group of preference shareholders alleged that the directors had acted in their own interst and in breach of their duties.  May seek an order in tandem with a winding up pursuant to ss 232, 233 or 461(1)(k) of the CA. o SS 232 and 233 allow applications ot the court for relief, where inter alia, the affairs of the company are being conducted oppressively. o S 461(1)(K) allows an application for a winding up order on the basis that it is just and equitable that the company be wound up.  The interests of the members of the company are of particular relevance where both the application for winding up and for the appointment of a provisional liquidator are made pursuant to a resolution of the directors rather than of the members: Re T & L Trading (Aust) Pty Ltd (1986).

Company  Will only apply where it has sought it own winding up.  May arise in circumstances where a voluntary liquidation is not possible because of a deadlock in the company.

1 o Also has arisen where voluntary liquidation could not be initiated as swiftly as necessary, and the directors believed it was critical that an independent administrator be appointed immediately. o Could be the case where the directors believe the company is insolvent and if it continued to incur debts they might be liable under the CA, s 588G for insolvent trading.  It has never been a valid response of a director, served with a tax penalty notice, to simply put the company into provisional liquidation; only liquidation of the company will provide a relevant response to such a notice.  In Olive v Litchfield Trading Co Pty Ltd [2015], the court ordered a provisional winding up where there was a serious dispute between the company’s two directors and one of the directors sought a winding up order on the basis of concerns about potential . o Additional costs did not disadvantage creditors.  Indeed, the court considered that their positions might be better protected because they could deal with the provisional liquidators, rather than separately with each of the directors.

Undertaking as to damages may be required  The court may require a creditor applying for the appointment of a provisional liquidator to give an undertaking as to damages.

Grounds for appointment  The court has a wide and complete discretion whether or not to appoint a provisional liquidator: Re McLennan Holdings Pty Ltd (1983).  The courts have said it is inappropriate to limit the power by restricting its exercise to fixed categories or classes of circumstances or facts.  Certainly there must be good grounds for the appointment and it must be sought for a bona fide purposes. o E.g., the mere need to preserve the financial records of the company can be provided for by an order under the court’s rules for interim custody rather than by the appointment of a provisional liquidator.  The court should consider the degree of urgency the need established by the applicant creditor, the public interest and the balance of convenience.  Before such an order can be made, there must be before the court a valid application to wind up the company which itself discloses a good basis for a winding up order; a provisional liquidator is not usually appointed unless it is likely that a winding up order will be made. o A provisional liquidator will not be appointed merely because the company is insolvent although insolvency will be relevant.  But unless an applicant can demonstrate that there is a need for an interim control of the company pending the winding up of the company, no appointment will be made.

Instances where appointments have been made  Provisional liquidators have been appointed in the following types of circumstances: o Where, in the public interest, there is a need for an examination of the state of the accounts of a company: Tickle v Crest Insurance Co of Australia Ltd (1984). o Where the company is paralysed without a board of directors, and its sole shareholder has applied for a winding up due to the company’s insolvency: Telfer v Astarra Securities Pty Ltd [2010]. o Where company funds may be at risk: ASC v Solomon (1995). o Where the company had been involved in unethical and irresponsible business conduct; there were no audited balance sheets; the company had refused to provide information; there was a need to protect assets under threat from the mortgagee; and the company was shown to be insolvent, with large outstanding debts, and the company could not explain how it would pay them: Omarjee v Lincoln Hunt Australia Pty Ltd (1986) o For the purpose of ascertaining whether the company could pursue both its directors and the recipients of a purported dividend that had been paid contrary to the CA to companies controlled by certain directors: Yellowrock Pty Ltd v Eastgate Properties Pty Ltd [2004].

2 o For the purpose of assessing a medical indemnity insurer’s capacity to respond to a combination of developments, including declining capital reserves, a demand for increased capital being made by the regulator, foreshadowed changes to accounting standards, and a contraction of the medical insurance market: Re United Medical Protection Ltd [2004]. o Where the affairs of the company have been carried on casually and without due regard to legal requirements so as to leave the court with no confidence that the company’s affairs would be properly conducted with due regard for the interests of shareholders: . In effect paralysis of the company can occur because of disputes between shareholders or directs; or a conflict of interest that a director has between his or her own personal interest and the company’s interest which may lead the affairs of the company being put in jeopardy: Re McLennan Holdings Pty Ltd (1983).

Effect of an appointment  An appointment will paralyse the operations of the company, and while a company can trade on, the appointment will usually damage its business.

Company officers can no longer exercise their powers, and they assume obligations  Company continues to exist, but the liquidator assumes control of the company.  At common law, the directors retained residual powers but this is no longer the case given the terms of s 471A(2) of the CA. o That section provides that officers, which term includes directors, are unable to perform or exercise a function or a power as an officer of the company where a provisional liquidator has been appointed unless that officer is acting with the written approval of the provisional liquidator or with the approval of the court.  Necessarily, the provisional liquidator, and also an administrator of the company appointed after the provisional liquidator, are given authority as officers of the company.  At the same time, officers immediately assume obligations ot the provisional liquidator.  S 475(1) requires the directors and the secretary to prepare and give to the provisional liquidator a report as to the affairs of the company. o The liquidator can also give notice that such a report is required within 14 day of service of the notice: s 475(2) – (5) . ILRB 2015 propose 10 business days

Proceedings against the company are stayed  On the appointment of a provisional liquidator, there is a stay of proceedings so that no action or other civil proceeding may be begun or continued against the company without the leave of the court: s 471B.  While the same general principles will apply in considering such applications for leave as for a company in liquidation, the more limited role of the provisional liquidator can mean that leve to proceed will more readily be granted.  The maintenance of a creditor’s proceedings by way of leave being granted may be the only basis upon which its claim may be brought: Ibbco Trading Pty Ltd v HIH Casualty and General Insurance Ltd [2001].

The provisional liquidator  The appointee must be an official liquidator (s 472(2)) who amy become the liquidator of the company if a winding up order I made. o The ILRB 2015 will remove the concept of official liquidator so that the only requirement will be that the appointee is a registered liquidator.  But the appointment of a provisional liquidator is not regarded as the beginning of a winding up; of course, a winding up order may never be made.

3  The requirements for a provisional liquidator to be independent of the company maynot be fully applied if there is urgency and a need for prompt familiarity with the company assets and affairs (Re Central Queensland Earthmoving Pty Ltd (1984)) although the appointment may be revisited at the time of making the winding up order. o Hence, appointment of the provisional liquidator as liquidator is not certain.  In Re Giant Resources Ltd [1991], the court declined to appoint the provisional liquidator as liquidator because there was a need for investigation by the liquidator of companies associated with the provisional liquidator’s firm.  In Cox v T-D Joint Venture Pty Ltd [2010], the court appointed liquidators from a larger firm than that of the provisional liquidator when it became apparent that the company was involved in interstate and international litigation.  Aside from this, the grounds which apply to the disqualification of a liquidator from acting in any given , e.g., in relation to prior financial connections with the company, apply to provisional liquidators: s 532(1A).  S 536 of the CA specifically applies to a provisional liquidator: s 536(1A).

Powers under the CA  Provisional liquidator’s powers are derived from the CA, the Corporations Regulations 2001 (Cth), the Court’s Corporations Rules, the order of appointment and any supplementary orders made.  On the making of the order to appoint a provisional liquidator, the management of the company is effectively under the control of the appointee.  A provisiaonlly appointed liquidator has the power to carry on the company’s business (2 472(4)(a)) and other provisions in s 472 confer on provisional liquidators most of the powers which are given to liquidators pursuant to s 477. o On occasions, the provisional liquidator is given all powers of a liquidator . These include powers arising under the company’s constitution with respect to special contracts: Re United Medical Protection Ltd (No 4) [2002].  The court order may require the provisional liquidator to identify the assets of the company and its likely solvency within a short period of time, as well as any apparent misconduct by company officers; or may limit the provisional liquidator’s powers to taking custody of the assets and carrying on the business in order to maintain the status quo until the winding up application has been determined. o Courts have emphasised this provisional role and that any powers conferred must be exercised in light of this purpose: Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd (No 4) (1984).  While a provisional liquidator is given a specific power to carry on the company’s business (s 472(4)(a)), this should only be done in order to preserve the status quo pending given to a provisional liquidator.  The provisional status of the role is reinforced by the fact that the powers to carry on the business, and other powers in s 472(4), are subject to the control of the court and a creditor, a contributory or ASIC.  Each of these may apply to the court requesting it to rule on the use or proposed use of such power: s 472(6).  In Olive v Litchfield Trading Co Pty Ltd [2015], the provisional liquidators were ordered to provide a report to the court concerning the management and trading status of the company, and their opinion as to whether the company or its assets were capable of being sold as a going concern and whether a final winding up order should be made.

Discretion in exercising powers  Provisional liquidators must exercise their discretion on many matters, and often in a short timeframe.  In some cases, ultimate interests of the creditors and members may be such that the assets should be sold quickly, rather than simply being preserved, assuming that this power is granted by the court order. o There may also be circumstances in which there is need to sell the actual business of the company, e.g., Re Bayswood Pty Ltd (1981) where the company had little funds and the lease of its premises had expired.

4  A provisional liquidator may, if the commercial circumstances dictate, depart from the traditional role of simply protecting and preserving. o However, a prudent liquidator would seek court directions where there is no legal obligation to seel, but where it is considered that it is the correct course of action: Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989).  Whether any sale is commercially prudent is primarily a matter for the judgment of the provisional liquidator. o Unless bad faith is established, the decision will be regarded as proper, except whet the court is satisfied that the liquidator acted in a way in which no reasonable liquidator should have acted: Northbourne.  If a provisional liquidator has any doubt as to whether a certain power is available an application may be made to the court to grant the power: Re Rothwells Ltd [1990].

Duties and responsibilities  Same principles which generally regulate liquidators apply to provisional liquidators. o However, as we have seen, the independence requirements for the appointment of a provisional liquidator may not be fully applied if there is urgency involved and a need for the appointee to have familiarity with the company’s assets and affairs. o Provisional liquidator owes fiduciary duties to the company, and is the company’s controlling agent and an officer of the court, and is the one responsible for the administration of the company during the period of provisional liquidation.

Remuneration  Entitle to such remuneration as is fixed by the court: s 473(2) o Creditors have no role o ILRB 2015 proposes to allow the creditors, or a committee or the court to determine the remuneration of provisional liquidators.  The law gives some protection to the remuneration of a provisional liquidator.  A portion of their remuneration and expenses which relate to the caring for, preserving or realising of assets which are subject to security are entitled to rank in priority to the rights of a in relation to those assets: Re Universal Distributing CO Ltd (1933). o Also has an equitable aver the assets under administration to secure payment of their remuneration and expenses: Nationwide News Pty Ltd v Samalot Enterprises Pty Ltd (No 2) (1986). o The lien remains available even if the provisional liquidator is not appointed as the liquidator; the subsequent liquidator must respect the lien: Shirlaw v Taylor (1991)  To the extent that the equitable lien is not sufficient to satisfy the remuneration and expenses, the provisional liquidator is entitled to priority in the winding up in accordance with s 556(1)(a).  Given that a provisional liquidator’s powers are limited, remuneration for work done outside the scope of the work that is authorised cannot be claimed: Re Reiter Brothers Exploratory Drilling Pty Ltd (1994). o Remuneration can be awarded for work necessarily done by the appointee.

Interactions with other arrangements  Provisional liquidation may be an alternative to another insolvency administration such as a voluntary administration, or it may potentially conflict with another administration, such as .

Provisional liquidated and Pt 5.3A administration  Appointment of a provisional liquidator may be an appropriate measure where interim administration is needed and where urgent decisions may need to be made.  Appointment of administrator under Pt 5.3A of the CA is more suitable in some cases; apart from other considerations, the court does not have to be involved in an administration and the overall cost should be less.

5  Pt 5.3A may also result in ultimate survival of the company o In some provisional liquidation cases, such as Re United Medical Protection Ltd, provisional liquidation under the control of the court served a purpose of allowing those companies to resume trading.  A company is prevented from appointing a voluntary administrator if a provisional liquidator is appointed: s 436A(2) o In such a case the provisional liquidator may appoint a voluntary administrator over the company: s 436B.

Provisional liquidation and receivership  The fact that a receiver has been appointed under Pt 5.2 of the CA does not preclude the appointment of a provisional liquidator: National Investment Institute Pty Ltd v Property Corporate Services Pty Ltd [2004]. o However, the appointment of a provisional liquidator may be refused wehre a receiver has been appointed subsequent to the filing of an application to wind up and the receiver’s control of the assets of the company is consistent with maintaining the status quo.  In fact a receiver may in some cases be more appropriate appointment. o In Re United Medical protection Ltd [2002], the court considered whether a receiver should be appointed to the UMP group of companies, it was held: . Receivership is a very flexible equitable remedy … not limited to the interim preservation of assets. . While a receiver and manager may be personally liable for debts incurred in continuing the company’s business … it may be possible for the Court to avoid that outcome in an appropriate case by directing the receiver to make contracts in the company’s name and on its behalf. . On the other hand, a provisional liquidator has the power to conduct the company’s business on behalf of the company and in its name, and it is nowadays more common than it once was for the appointment of a provisional liquidator to be made where it is not intended that the company’s business be immediately shut down.

Provisional liquidation preceding a scheme  Provisional liquidation has also been used where the company is in financial difficulties and wishes to initiate a under Pt 5.1 of the CA  A scheme takes some time to formulate and to be sanctioned by the court.  Early appointment of a provisional liquidator may relieve the concerns of creditors and demonstrate the good faith of the directors.  The stay on all proceedings against the company unless with court leave assists the process of a scheme being approved. o A scheme of arrangement of itself provides no stay against creditor claims.

End of the appointment  Provisional liquidation comes to an end either when a winding up order is made, or when the application to wind up is dismissed or withdrawn. o However, administration will come to an end if the appointee resigns or is dismissed, or an appeal against the appointment succeeds.  Court may also terminate the appointment where there is no longer a need for it: Grace v Grace (No 5) [2013].  In Re United Medical Protection Ltd [2003] on ordering the end of the provisional liquidation of the UMP group of companies, the court held that it was:

6 o Satisfied that the purposes for which … a provisional liquidator was appointed to the four companies have been exhausted and there is no longer any good reason for a provisional liquidator ot remain in control of them. o Termination of the appointment will not operate in a manner contrary to the interests of creditors, … it is in the public interest to make the orders for termination.  A provisional liquidator who is succeeded by another registered liquidator as liquidator appointed pursuant to a winding up order must account to that new liquidator and transfer any money, property, books and papers of the company over which he or she has custody: ss 474 and 483 CA.

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