Appointment of a provisional liquidator pending a winding up petition of a Company-More flexibility than the past

 The appointment of a provisional liquidator to a Company could be considered as a decisive and very serious development to the operation of the Company.  That’s why if there is an alternative way to anticipate the risk of alienation of assets throughout the issuance of a discovery order or a freezing order, the appointment of a provisional liquidator will not be preferred by the Courts. As Lord Justice Rimer held in the Re Union Accident Insurance Co Ltd (1972) 1 ALL ER 1105, the appointment of a provisional liquidator is a most serious step for a court to take because it is likely in many cases to have a terminal effect on the company’s trading life. As it seems from the recent judgments of District Courtsin Cyprus, there is more flexibility on this matter than the past.

The appointment of a provisional liquidator is provided for by section 227 of the Companies Law, Cap. 113, as amended, which provides that the Court may appoint a liquidator provisionally at any time after the presentation of a winding-up petition and the appointment of a provisional liquidator will remain in force until the issuance of a winding up order.

A provisional liquidator may be a licensed insolvency practitioner or official receiver or any other suitable person who temporarily exercises the powers conferred to them by the Court.

Recently the District Court of Limassol in the petitions no. 523/2021 and in the petition, no. 132/2022 issued an ex parte order for the appointment of a provisional liquidator pending a winding up petition of a Company based in Cyprus. The District Court of Limassol in the above-mentioned cases, provided an interesting and explanatory judgment concerning this type of order. In these cases, a winding up petition was filed against a Company, following its failure to pay its debt, pursuant to sections 211 (e) and section 212(a) of the Cap. 113, as amended. Pending the winding up petition, the petitioners filed an ex parte application requesting the appointment of a provisional liquidator together with a freezing order preventing the disposal of assets of the Company until the final judgment in the main petition for winding up.

The District Court of Limassol held that an order for the appointment of a provisional liquidator could be issued for the purposes of protection of the company’s assets and the maintenance of the status quo of the company until the company is wound up. However, the provisional liquidator does not have any right to proceed with the distribution of the Company’s assets.

Further, the District Court of Limassol also mentioned that there is more flexibility on this aspect than in the past considering that the appointment of a provisional liquidator is possible even though the only asset of the Company might be located outside of its jurisdiction. The provisional liquidator may however exercise only specific powers conferred on him by the Court, which may include the possibility of seeking redress from a foreign court concerning the assets.

According to the English case law on the matter, which seems that is in line with the Cyprus judgments, the usual basis on which such an appointment is sought is because of a risk of jeopardy to the company’s assets, namely the risk of their dissipation before the winding up order is made, with the consequence that their collection and rateable distribution between the company’s creditors will be frustrated. (Re a company (No 003102 of 1991) ex parte Nyckeln Finance Co Ltd (1991) 1 BCLC 539, at 542, per Harman J). Specifically, the Petitioner must show that the risk of alienation of assets exists through specific movements and behaviour. In other words, the purpose of this order is to prevent the alienation of assets in order not to hinder the liquidation process for the benefit of all creditors.

It is noted that the appointment of a provisional liquidator does not nullify the powers of the Company’s directors, who could object to the winding up petition and request the annulment of the order appointing the provisional Liquidator.

As to the type and nature of the order of the appointment of a provisional liquidator could not be considered as an interim order but an order concerning the whole process of the application for the liquidation of the company.(Petition no 64/2003, According to the petition of Printek Dataforms Express Ltd (2003) 1.A.A.D 1193).

Additionally, an order for the appointment of a provisional liquidator could be considered as similar with a freezing order (mareva order) but there is a substantial difference between the two orders. A freezing order will not (at least in theory) prevent transactions that take place in the ordinary course of business, whereas if a provisional liquidator is appointed the business will usually grind to an instant halt. For another the need to preserve books and records may be an important factor in deciding whether to appoint a provisional liquidator. This may be so where there is clear evidence of fraud or even where there is almost irrefutable evidence of chaos.

Lastly, it is also noted that because of the appointment of a provisional liquidator is so intrusive, an application for such an appointment made without notice (ex parte) needs to be justified by exceptional circumstances. A judge should not entertain an application of which no notice has been given unless either giving notice would enable the defendant to take steps to defeat the purpose of the remedy or there has been literally no time to give notice before the remedy is required to prevent the threatened wrongful act. (National Commercial Bank of Jamaica Ltd v Olint Corp Ltd (2009) UKPC 16 (2009) 1 WLR 1405).

Contributing Advisors