When a Court appoints a Provisional Liquidator

The appointment of a Provisional Liquidator would have a major effect into the affairs of a company and will only be done in circumstances where there are no other remedies available to maintain the current situation pending a final determination of a winding up application. Unlike the usual Liquidator, a Provisional Liquidator does not evaluate claims against the company or try to distribute the company’s assets to creditors, as the power to realise the company’s assets occurs after the Court orders liquidation.

An application for the appointment of a Provisional Liquidator is usually made by the following parties:

  1. Shareholders of the Company – When they are concerned that the directors of the company are acting improperly;
  2. Creditors of the Company – When they are concerned that the assets of the company are at risk or might be immoral or put beyond the reach of creditors during the period before the winding up application is heard; or
  3. The Company itself – This may arise due to a dispute between directors and other officers of the company, or because the company is insolvent and the directors do not want to risk insolvent trading claims in the period before an Official Liquidator is appointed.

In the Supreme Court of New South Wales matter of Plutus Payroll Australia Pty Limited [2017] NSWSC 1041, the principles concerning the appointment of a Provisional Liquidator is confirmed.

In Plutus Payroll Australia Pty Limited, the company and a number of related entities were involved in the business of providing payroll services. The companies were also the subject of one of Australia’s largest tax fraud investigations.

On 6 June 2017, the Deputy Commissioner of Taxation applied for orders under section 461 of the Corporations Act 2001 (Cth) (Act) for the winding up of the companies on fair and reasonable ground and under section 472 of the Act appointing Provisional Liquidators to the companies.

Based on the evidence provided by the Deputy Commissioner of Taxation, the court was satisfied that prima facie there was a strong case for a winding up order in respect of each of the companies on the ground of insolvency and on fair and reasonable ground.

The question of whether there was sufficient cause for the appointment of Provisional Liquidators to the Companies, can be noted by the following factors considered by the Court in favour of the position that Provisional Liquidators be appointed: –

  1. Directors of the Companies – the recorded Directors were not in truth, acting as the Directors;
  2. The history of the Companies – the companies were engaged in phoenixing arrangements which bespeaks a risk that any one of the Companies has recoverable assets; and
  3. Public interest – the companies have incurred enormous taxation liabilities and should not be permitted any longer as trading entities.

As discussed above the case sets out some of the factors the court will consider when determining whether to appoint Provisional Liquidators. As the court regularly has discretion whether to appoint a Provisional Liquidator and also given the major impact of such a step on a company, the court will not normally approve the application unless it is satisfied that there is a strong likelihood that a Liquidator will be appointed on the substantive application.