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Provisional Liquidation Introduction After the Filing of An Topic 3 – Provisional Liquidation Introduction After the filing of an application for winding up and while it is pending, the creditor may find that the assets and affairs of the company are in jeopardy and are being dealt with to avoid the consequences of liquidation. Creditors 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 liquidator 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 provisional liquidation 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 debtor’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 insolvency. 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.
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