Scotland: guide to the appointment of a provisional liquidator
Produced in partnership with Tim Cooper of Addleshaw Goddard
Scotland: guide to the appointment of a provisional liquidator

The following Restructuring & Insolvency practice note produced in partnership with Tim Cooper of Addleshaw Goddard provides comprehensive and up to date legal information covering:

  • Scotland: guide to the appointment of a provisional liquidator
  • Coronavirus (COVID-19)/CIGA 2020
  • When are provisional liquidators appointed?
  • Threshold Test
  • Notice and advertising of appointment of a provisional liquidator
  • What powers do provisional liquidators have?
  • What duties do provisional liquidators have?
  • What effect does the appointment of a provisional liquidator have?
  • Provisional Liquidator's remuneration.
  • Conversion of from the appointment of a provisional liquidator to administration by floating charge holders
  • More...

For the impact of Brexit on Scottish procedures, see Practice Note: Table showing impact of Brexit on jurisdiction to commence insolvency/restructuring proceedings and obtain recognition in other EU Member States.

The Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018, SI 2018/1082 and Insolvency (Scotland) (Receivership and Winding up) Rules 2018, SSI 2018/347 ('ISRWUP Rules 2018') came into force on 6 April 2019. The content of this Practice Note reflects the application of these rules (the ISRWUP Rules 2018 being those specifically of relevant to this note). It does not address any transitional provisions as may be applicable, on the assumption that there will be few cases remaining for which the transitional provisions would be relevant. For further information on the changes, see:

  1. Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018, LNB News 15/10/2018 111

  2. Insolvency (Scotland) (Receivership and Winding up) Rules 2018, LNB News 15/11/2018 7

  3. New insolvency rules for Scotland—what the changes will mean

  4. New changes under the Insolvency (Scotland) (Receivership and Winding up) Rules 2018

As in England, the appointment of a provisional liquidator is an emergency procedure governed by section 135 of the Insolvency Act 1986 (IA 1986) and is sought pending the court's determination of a winding-up petition (for the position in England, see: Provisional liquidator—overview). As there is no official receiver in Scotland, a licensed insolvency practitioner (IP) is

required to consent to act as provisional liquidator and confirm they are qualified to act (see ISRWUP Rules 2018, r 5.4(2)). This is known as ‘having caution’ (pronounced 'cayshun

') in Scotland. For a glossary of commonly used Scottish insolvency terms, see Practice Note: Glossary of Scottish insolvency words and expressions.

The provisional liquidator's principle duty is to preserve and safeguard the company's assets if they are perishable or likely to be removed before a winding-up order is made, to minimise the risk of loss to the company's creditors.

A provisional liquidator should be distinguished from an interim liquidator in Scotland. An interim liquidator is appointed by the court on the making of the winding-up order, and is subject ratification or replacement by the creditors (see Practice Note: Scotland: compulsory liquidation).

Coronavirus (COVID-19)/CIGA 2020

This content is affected by the coronavirus (COVID-19) pandemic. For further details, take a look at our Coronavirus (COVID-19) toolkit. For related news, guidance and other resources to assist practitioners working on restructuring and insolvency matters, see: Coronavirus (COVID-19)—Restructuring & Insolvency—overview and News Analysis: Corporate Insolvency and Governance Act 2020—winding up petitions and statutory demands (Scotland).

Regulations to extend both Scottish Coronavirus Acts for a further six months have been approved by the Scottish Parliament. This means that the provisions in Part 1 of both Scottish Acts, subject to certain exceptions deemed no longer necessary, will now expire on 31 March 2021.

When are provisional liquidators appointed?

In terms of IA 1986, s 135(1) and 135(3), the Scottish courts (see further below) have the power to appoint a provisional liquidator, at any time:

  1. after the presentation of a winding-up petition, and

  2. before the first appointment of interim liquidators

The appointment of a provisional liquidator is more common in Scotland than in England principally because there is no requirement for an undertaking in damages in Scotland, despite the fact that a company can go into compulsory liquidation quicker in Scotland than in England.

The appointment of a provisional liquidator may be appropriate where there is a real concern that, between the presentation of a winding-up petition and the making of an order, the company's affairs will not be properly conducted or its assets will be dissipated (see Practice Note: Scotland: compulsory liquidation).

A provisional liquidator can be appointed almost immediately if it is a petition presented by the directors and such appointment can continue for many months if deemed necessary. An appointment under IA 1986, s 135 can be sought by anyone entitled to petition for liquidation ie any creditor or contributory, the directors, the company, the Secretary of State, a temporary administrator, or another member state liquidator appointed in the main proceedings (see ISRWUP Rules 2018, r 5.4(1)).

The provisional liquidator must confirm that they consent to act to the appointment (see ISRWUP Rules 2018, r 5.4(2)).

The request for the appointment of a provisional liquidator can be contained in a winding-up petition or subsequently by note (ie application) in the process of the petition. Only a company that is registered in Scotland or has its centre of main interest (COMI) in Scotland (see Practice Note: Table showing impact of Brexit on jurisdiction to commence insolvency/restructuring proceedings and obtain recognition in other EU Member States) can enter into liquidation in Scotland (and therefore by default, the appointment of a provisional liquidator (see Bank Leumi (UK) Plc v Screw Conveyor Ltd)).

There are two options on where to present the petition:

  1. the Sheriff Court local to the company (based on the last six months), or

  2. the Court of Session in Edinburgh (this option is only available to companies with a share capital of £120,000 or greater)

Threshold Test

The effect of appointing a provisional liquidator is considered extreme as it can have an adverse effect on a trading company. Accordingly, an application to appoint a provisional liquidator must satisfy the court that there are assets required to be protected between the presentation of the petition and a winding-up order being granted and that it is in the best interest of creditors that a provisional liquidator is appointed.

The court's power is discretionary and so it needs to be shown in the petition that there is a greater risk in not appointing a provisional liquidator than a provisional liquidator being appointed and in doing so the court will consider the following:

  1. is the petitioner likely to obtain a winding-up order? The court must be convinced there is a good prima facie case for the winding-up order (see: Highfield Commodities Ltd)

  2. is it right to appoint a provisional liquidator?

  3. can the applicant justify that there will be damage to company's assets if a provisional liquidator is not appointed? For example in the case of Revenue & Customs Commissioners v Rochdale Drinks Distributions Ltd it was argued that records would be lost/destroyed if a provisional liquidator was not appointed

Unlike England, in Scotland, there is no requirement for a supporting witness statement to be lodged with the application for a provisional liquidator as the information in support will be included in the winding-up petition itself. The petition must, therefore, stress the reason and urgency of the appointment is in order to preserve the assets in the company's position.

Notice and advertising of appointment of a provisional liquidator

Given the nature of the remedy, applications for the appointment of a provisional liquidator are made urgently by the creditors and usually without giving notice to the company or its directors—so it is possible for a provisional liquidator to be in office before the directors are aware of their appointment.

After an order appointing the provisional liquidator has been granted, the provisional liquidator must notify the Registrar of Companies for Scotland, the Accountant in Bankruptcy (AiB), the company (or its liquidator, if appointed under a CVL) and any receiver of the whole or any part of the property of the company of their appointment. This is required by ISRWUP Rules 2018, r 5.5.

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