When a creditor to a company believes that that company is insolvent, it is open to that creditor to present a Petition for the compulsory liquidation of that company.  Section 135(1) of the Insolvency Act 1986 allows the creditor, on submitting a Petition for the winding up of a company, to apply for a provisional liquidator to be appointed.

The Court will only appoint a provisional liquidator where there is a real concern that between the presentation of the Winding Up Petition and the making of a Winding Up Order, the company’s affairs will not be conducted properly or its assets will be stripped out.

On making an application for a provisional liquidator, the creditor must give a cross undertaking on damages, that should the Court eventually find that the company should not be liquidated, he will cover any losses. However, recent guidance by the Court of Appeal made it clear that this is not a sufficient to guarantee a successful application.

The appointment of a provisional liquidator, especially if it is done without notice, normally results in the company being closed down, ongoing business stopping and employees losing their jobs.  The provisional liquidator will appear unannounced with a Court Order and in effect freeze all company activity until they have conducted a thorough investigation.

As such, an appointment made without notice needs to be justified by exceptional circumstances.  A Judge will only entertain an application made in secret, unless giving notice to the company would enable the company to take steps to defeat the creditor’s purpose. As in the case of a Freezing Search or Seizure Order, there has to be good evidence that the defendant is likely to take the opportunity of the notice period to do something seriously wrong.

When the appointment of a provisional liquidator is notified to the directors of the company, the directors of the company do have the opportunity to apply to have that appointment struck out. In practice that should be done quickly. As the creditor give full disclosure to the Court before provisional appointment, the directors will have the benefit of being able to review all the evidence that the applicant has against them.  Once that has been reviewed, they may be advised that there are grounds to have the application revoked.

Alternatively, directors may rather save their powder and prepare for a personal claim against them by the liquidator. Which way to go is an important decision, often taken quickly and in a moment of crisis? Good advice is essential, before incurring legal expenses that might be more productive later.   It is not always the best way forward to throw oneself into an expensive battle to keep the company going, if the underlying problem will not go away and resources are best spent on that.