Introduction
English Courts have an extensive arsenal of interim measures available to protect unpaid creditors against debtors seeking to evade their responsibilities. A worldwide freezing injunction is one - see more details in our article here. Another less-known, measure is provisional liquidation.
Provisional liquidation is an emergency measure that can be used in support of a winding-up petition. The effect of an order for provisional liquidation is very serious. It is that the directors of the respondent company lose their powers (except to challenge the provisional liquidation order), and those powers are transferred to an officer of the Court, called provisional liquidator: Pacific & General Insurance Co Ltd v Hazell [1997] B.C.C. 400.
An almost inevitable consequence of the order is that the respondent company is blocked and ceases trading. The rest depends on the specific powers granted to the provisional liquidator, but they often include the power to prevent the dissipation of assets and to investigate the company’s activities / inspect the company’s books and records to prevent wrongdoing on behalf of the former directors or other persons in control of the respondent company.
Importantly, an order for provisional liquidation may be made ex-parte, i.e. without prior notification to the respondent company. It can also be made on an urgent basis, within hours or, at most, days of an application being filed with the Court.
This article considers the conditions for the appointment of a provisional liquidator in England and then provides case law examples of the circumstances in which English Courts appointed provisional liquidators.
Statutory Basis
The appointment of provisional liquidators is governed by Section 135 of the Insolvency Act 1986, which provides that:
(1) Subject to the provisions of this section, the court may, at any time after the presentation of a winding-up petition, appoint a liquidator provisionally.
(2) In England and Wales, the appointment of a provisional liquidator may be made at any time before the making of a winding-up order; and either the official receiver or any other fit person may be appointed…
Conditions for appointment of a provisional liquidator
A provisional liquidator may be appointed if the following conditions are satisfied:
- The Court may appoint a provisional liquidator only between the presentation of a winding-up petition and the issuance of a winding-up order (Section 135, Insolvency Act 1986). This period allows for the provisional liquidator to manage and protect the company’s assets while the Court determines whether a winding-up order is warranted.
- The Court must have the requisite jurisdiction over the company to appoint a provisional liquidator. This includes companies that are incorporated in England and Wales or foreign companies that can be wound up as unregistered companies under Section 220(1) of the Insolvency Act 1986. This jurisdictional reach was affirmed in cases like Stocznia Gdanska SA v Latreefers Inc [1998] EWHC 1203 (Comm).
- It must be likely that the company will ultimately be wound up: Union Accident Insurance Co Ltd [1972] 1 WLR 640.
- One of the following requirements is satisfied:
- appointment of a provisional liquidator is necessary to prevent dissipation of assets;
- appointment of a provisional liquidator is in the public interest or necessary to prevent illegal activity on the part of the company;
- there is a risk to the integrity of the company’s books and records if the provisional liquidator is not appointed;
- there is an urgent need for insolvency management.
The requirements in the preceding paragraph are further considered below by reference to English case law on this subject.
Illegal activities and risk of dissipation
A key reason for appointing a provisional liquidator is to prevent the dissipation or improper use of a company’s assets by its directors, particularly during the interim period when such risks are heightened. This measure is crucial when there is evidence suggesting that the directors might engage in illegal activities, such as fraud or breach of sanctions. The Court intervenes to ensure that an independent third party manages the assets, thereby protecting them from being depleted, misused, or involved in unlawful conduct.
Revenue and Customs v Rochdale Drinks Distributors Ltd [2011] EWCA Civ 1116. In this case, the Court appointed a provisional liquidator on an ex-parte basis due to serious concerns about the integrity of the company's management and its accounting practices. Lord Justice Lewison described the appointment of a provisional liquidator as "one of the most intrusive interim remedies in the court’s armoury" (paras 109-111) and Lord Justice Rimer emphasised at para 99 that appointing a provisional liquidator is a very serious step, likely to cause the underlying business to cease, and the resulting damage may be irremediable. At para 113, the Court concluded that the mere likelihood of a winding-up order on a creditor's petition is insufficient to justify appointing a provisional liquidator; additional justification is needed. Nonetheless, in Rochdale Drinks, the Court found it necessary to appoint a provisional liquidator due to concerns about the integrity of the company’s management and the quality of its accounting and record-keeping as the provisional liquidator’s role includes taking control of the company’s books and records to investigate its transactions.
Financial Conduct Authority v Allied Wallet Ltd [2019] EWHC 2808 (Ch). The Court appointed provisional liquidators for an electronic money institution due to concerns about the co-mingling of company and customer funds and the non-disclosure of significant regulatory actions by the US Federal Trade Commission. These issues highlighted severe deficiencies in the company's record-keeping and raised the risk of asset dissipation. The Court intervened to preserve the status quo and ensure proper management of the company’s assets until a final decision could be made on the winding-up petition.
Barker v Baxendale-Walker [2018] EWHC 2518 (Ch). The Court dealt with issues of fraudulent asset management by appointing interim liquidators to manage the company's affairs. The case involved a solicitor who provided negligent tax advice, leading to significant financial losses. The Court emphasised the necessity of interim liquidators due to the risk of continued asset dissipation and potentially fraudulent activities.
Secretary of State for Business, Innovation and Skills v New Horizon Energy Ltd [2015] EWHC 2961 (Ch). Provisional liquidators were appointed on a without-notice basis for companies involved in selling dubious oil and gas investments. The Court found that the companies failed to provide adequate explanations for the use of investors' funds and were obstructive in regulatory investigations. The appointment was deemed necessary to protect investors and prevent further illegal activity, emphasizing the importance of transparency and proper record-keeping.
Parkwell Investments Ltd v Wilson [2014] EWHC 3381 (Ch). The Court appointed a provisional liquidator due to the company's involvement in fraudulent VAT evasion. The appointment was made on a without-notice basis. The directors were found to have engaged in practices that undermined the integrity of the company's financial records. The Court highlighted the risk of asset dissipation and fraudulent conduct, justifying the need for a provisional liquidator to manage the company’s affairs and protect creditor interests.
A similar conclusion was reached in National Commercial Bank of Jamaica Ltd v Olint Corp Ltd [2009] UKPC 16, paras 17-18, where the appointment of a provisional liquidator was deemed appropriate due to serious concerns about asset dissipation. In this case, the company sought an interlocutory injunction against a bank for closing its accounts, alleging that the bank acted maliciously and in violation of the Banking Act 1992 (Jamaica) and the Fair Competition Act 1993 (Jamaica), with the intent to induce breaches of contract between the company and its clients.
Public interest considerations
The Court may appoint a provisional liquidator if the company is engaged in activities that contravene public interest and require immediate cessation.
Re Treasure Traders Corporation Ltd [2005] EWHC 2774 (Ch). The Court appointed a provisional liquidator to halt the operations of a company running an unlawful lottery, thereby protecting the public from ongoing harm. The Court concluded that the company’s business was unlawful under the Fair Trading Act 1973 and constituted an illegal lottery. Given the near certainty of a winding-up order, the Court found it appropriate to appoint a provisional liquidator to secure the company’s assets and prevent further unlawful activity.
DTI v Delfin International (SA) Limited [1998] 1 B.C.L.C. 71. The Court appointed a provisional liquidator for a company involved in illegal trading practices across multiple countries. Despite initial reluctance due to the company’s operations in jurisdictions where such activities were legal, the Court ultimately decided to appoint a provisional liquidator to prevent the continuation of unlawful activities in the UK. This decision emphasised the importance of protecting the public interest even when the company operated legally in other regions.
Highfield Commodities Ltd, Re [1985] 1 W.L.R. 149. The Court made an order to wind up and appointed a provisional liquidator on an ex-parte basis for a company dealing in strategic metals, following a petition by the Secretary of State on public interest grounds. The petition alleged a conspiracy between the company and its American agents to defraud customers in that country of money paid by them, relying on the difficulty and expense of suing the company in England. It was further alleged that the company had failed to keep proper accounts as required by section 12 of the Companies Act 1976 and that it was expedient in the public interest that the company should be wound up. The company’s operations raised significant public interest concerns, justifying the appointment without requiring an undertaking in damages. This case highlights the Court's willingness to intervene to safeguard the public interest, even without the typical financial safeguards.
Senator Hanseatische Verwaltungsgesellschaft GmbH, Re [1997] 1 W.L.R. 515. The Court dismissed an appeal against an injunction preventing the continuation of a multi-level money circulation scheme deemed to be an unlawful lottery. The decision emphasised the Court's role in protecting the public from schemes that, although involving some skill, primarily relied on chance and thus qualified as illegal lotteries. The appointment of a provisional liquidator was seen as necessary to halt these misleading activities.
MHMH Ltd v Carwood Barker Holdings Ltd [2004] EWHC 3174 (Ch). The Court appointed a provisional liquidator to protect the public interest due to the company’s involvement in the mis-selling of financial products. The company's substantial insolvency and the potential harm to numerous investors justified the Court's intervention. The appointment aimed to manage the company's remaining assets and address the claims against it, ensuring that the public interest was safeguarded during the resolution of these serious allegations.
City Vintners Ltd, Re [2001] 12 WLUK 207. The Court appointed provisional liquidators on an ex-parte basis without requiring the Secretary of State to provide an undertaking in damages, following an application made in the public interest. The Court found sufficient evidence of the companies' activities warranting immediate intervention to protect the public, dismissing the companies' arguments that the appointment was unnecessary and disproportionate. This case underscores the Court’s prerogative to prioritise public interest over corporate interests in cases of significant public harm.
One World Logistics Freight Ltd, Re [2018] EWHC 264 (Ch). The Court appointed a provisional liquidator due to concerns about the company's potential involvement in money laundering. The company’s bank had closed its accounts, preventing it from trading and raising suspicions about the legitimacy of its financial activities. The Court found that appointing a provisional liquidator was necessary to preserve the company's assets and maintain its operations, ensuring that the public interest was protected while the allegations were thoroughly investigated.
Urgent need for insolvency management
When a company is clearly insolvent and there is an urgent need to manage its affairs to protect creditors' interests, the Court may favour appointing a provisional liquidator over other insolvency procedures.
This urgency was evident in Data Power Systems Ltd v Safehosts (London) Ltd [2013] EWHC 264 (Ch), where the Court appointed a provisional liquidator to facilitate the swift sale of the company’s assets, given its dire financial situation.
Conclusion
Provisional liquidation is one of the nuclear weapons in the arsenal of the English Court. It blocks the business of the target company and deprives its directors of most of their powers. It also enables the provisional liquidator to investigate any wrongdoing which might have been committed via the company.
In order to appoint an interim liquidator, it is necessary to file a winding-up petition, demonstrate to the Court that the petition is likely to succeed and demonstrate the urgent need for interim liquidation such as, for example, that the company’s assets are being dissipated, the company is engaged in illegal activities or there is a risk to the integrity of its books and records. The order may be made ex-parte, i.e. without notifying the respondent company in advance, and on an urgent basis, within several hours or days of an application.
Fortior Law is a dynamic and growing international dispute resolution practice. Our London office is able to assist clients in their applications to appoint provisional liquidators or to resist the appointment of provisional liquidators by their opponents. Our Nicosia office also has substantial experience in appointment/resisting the appointment of provisional liquidators in Cyprus, which operates under similar principles to those described above. For more information, reach out to your contact at Fortior, to [email protected] for English matters, or to [email protected] for Cypriot matters.
