Circumstances for appointing a provisional liquidator
If a company is on the edge of insolvency, swift court intervention through a provisional liquidator might protect the remaining value, whilst ensuring fair legal oversight.
In Australia, provisional liquidators can be appointed in various circumstances. The six most common instances include:
- Insolvency: When a company is unable to pay its debts as they fall due, provisional liquidators may be appointed to protect the company’s assets and investigate its financial affairs while the court determines whether to proceed with a winding up order.
- Deadlock in management: If there is a complete breakdown in the relationship between directors, leading to an inability to make decisions or manage the company effectively, the court may appoint provisional liquidators to take control of the company’s affairs.
- Misconduct or mismanagement: When there are allegations of misconduct, fraud or mismanagement by the company’s directors, the court may intervene and appoint provisional liquidators to investigate and protect the interests of shareholders and creditors.
- Public interest: In cases where the company’s activities may harm the public interest, such as when a company has taken money from the public for a specific purpose but fails to fulfil its obligations, the court may appoint provisional liquidators to protect the public’s interests.
- Preservation of assets: If there is a risk that the company’s assets may be dissipated or removed from the jurisdiction, the court may appoint provisional liquidators to secure and preserve those assets pending the outcome of winding up proceedings.
- Just and equitable grounds: The court may appoint provisional liquidators when it is “just and equitable” to do so, considering factors such as the company’s viability, the relationship between directors, as well as the interests of shareholders and creditors.
The decision to appoint provisional liquidators is based on the specific facts of each case and is subject to the court’s discretion.
A case study example
The case of Davis-Jacenko v Roxy’s Bootcamp Pty Limited [2024] NSWSC 702 has shed light on the circumstances under which a court may appoint provisional liquidators to manage a company’s affairs prior to formal winding up proceedings.
Justice McGrath’s decision to appoint provisional liquidators in respect to Roxy’s Bootcamp Pty Limited (the Company) serves as a cautionary tale for business owners and highlights the importance of maintaining proper corporate governance and financial management practices.
Roxy’s Bootcamp Pty Limited was a company created to promote an online marketing course run by Roxy Jacenko, one of the Company’s directors, a well-known Australian entrepreneur and public relations powerhouse.
The Company launched a promotional scheme offering participants the chance to win prizes, including a Cronulla property or $250,000 cash. However, before the draw could take place, the relationship between the Company’s directors deteriorated, leading to a dispute and the eventual appointment of provisional liquidators.
Justice McGrath found that this was a “paradigm case” for the court to intervene and appoint provisional liquidators. The decision was based on two main factors:
- The likelihood of a winding up order being made on the “just and equitable” ground:
- The court found that there was a justifiable lack of confidence in the conduct and management of the Company’s affairs.
- The breakdown in the relationship between the directors had left the Company unable to make decisions or fulfil its fundamental purpose.
- Additionally, allegations of misconduct and mismanagement were made against the directors, further eroding confidence in the Company’s ability to function properly.
- The necessity to place provisional liquidators in control of the Company:
- The court determined that there was an urgent need to protect the public interest, as members of the public had already purchased the course in reliance on the Company’s statements about the prizes.
- With the directors ceasing to conduct the Company’s affairs and acting in their own interests, the appointment of provisional liquidators was deemed necessary to manage the situation.
Guidance for business owners
Provisional liquidation can be a sudden and disruptive event for business owners. Being proactive in managing financial health is key to avoiding court intervention and the appointment of a provisional liquidator.
By staying ahead of financial trouble, business owners can protect their operations and maintain control of their company’s future. Here’s how you can avoid this situation:
- Maintain proper corporate governance: Ensure your company has a clear decision-making process and that all directors are aligned with the company’s objectives. Regularly review and update your corporate governance practices to prevent stalemates and disputes that can hinder the company’s ability to function.
- Keep accurate financial records: Maintain complete and accurate books and records that reliably report your company’s financial position. Failure to do so can raise doubts about your company’s solvency and increase the risk of court intervention.
- Act in the company’s best interest: As a director, you have a duty to act in the best interest of the company, not your personal interests. Failing to do so can lead to allegations of misconduct and mismanagement, which may result in the appointment of provisional liquidators.
- Resolve disputes swiftly: Internal conflicts between directors or shareholders can destabilise the company and lead to deadlocks. Address disputes through mediation or legal advice to avoid escalation. Unresolved conflicts can prompt court involvement, increasing the likelihood of provisional liquidators being appointed.
- Seek professional advice: If your company is facing financial difficulties or internal disputes, seek the advice of insolvency practitioners or legal professionals who can guide you through the process and help you explore your options.
If you are concerned about the financial health or management of your company, be proactive in seeking professional advice to protect your interests and those of your stakeholders.
If you’re encountering difficulties or simply want to ensure that your business is on the right path, we invite you to contact us for a confidential consultation.
Contact AVA Advisory today on 1300 181 220 for a private, pressure-free discussion, or easily reserve a consultation slot through our streamlined online booking platform.
