Validation Orders After a Winding-Up Petition

You may need to consider a validation order when:

• You need to make payments out of the company’s bank account in order to continue to trade;
• You need to pay staff, suppliers, HMRC and other creditors;
• You need to dispose of property in the company’s ordinary course of business;
• You need to sell a company asset such as property or land; or
• You are concerned that past payments made after the petition may be void.

We will assess whether a validation order is necessary and proportionate in your circumstances.

The court will need to be satisfied by reference to documentary evidence that:

• The company is solvent and able to pay its debts as they fall due; or
• That a particular transaction or series of transactions will be beneficial to or will not prejudice the interests of all of the unsecured creditors as a class by reducing any potential return to unsecured creditors.

It is easier to get a validation order where the company is solvent as the onus of proving that an order should not be made is on the person opposing the making of a validation order. 

Examples of when the court will make a validation order include:

• To enable a solvent company to continue to trade profitably;
• A transfer of land at full value;
• To complete the sale of a lease where contracts had been exchanged before the presentation of the winding-up petition;
• To enable a company to enter into a funding arrangement to litigate abroad in order to recover assets belonging to the company;
• The granting of a charge over company property; and
• To enable the company to effect restructuring or other plans, which present the only prospect for unsecured creditors to recover debts owed by the company.

A witness statement will need to be prepared in support of the application for a validation order which usually needs to include:

• When and to whom notice of the application is to be given and whether any of these parties have consented to the application;
• The company’s registered office;
• The company’s nominal and paid-up capital;
• An explanation of the circumstances which led to the presentation of the winding-up petition;
• How the company became aware of the winding-up petition;
• Whether the debt is admitted or disputed and if it is disputed, a brief outline of the dispute;
• Full details of the company’s financial position, including details of assets and liabilities. This should be supported by documentary evidence such as annual accounts and up-to-date management accounts;
• A cash flow forecast and profit and loss forecast for the period for which the order is sought;
• Details of the dispositions or payments it is intended to make and the reasons why these dispositions or payments need to be made; and
• Details of any relevant bank account and the amount of the credit or debit balance on such account at the time the application is made.

Not always.  There are limited dispositions which do not fall within the scope of section 127 of the Insolvency Act 1986 and therefore an application for a validation order does not need to be made. 

However, the default position is that dispositions made after the presentation of a winding-up petition are at risk of being declared void if a winding-up order is made.  Therefore, it is important to always take legal advice from a solicitor specialising in insolvency as to whether an application for a validation order is necessary. 

Applications are often urgent.  The court will hear applications for a validation order urgently as long as the urgency is explained.  We can work quickly to prepare the application, provide notice of the application to all relevant parties and get the application heard by the court. 

It depends on the scope of the validation order granted by the court. 

The court has the power to grant a validation order allowing payments out of the company’s bank account in order to allow the company to continue to trade. 

In other situations, the court may only approve the making of specific payments or the completion of a particular transaction, such as a property sale. 

If the company is later wound up, transactions within the scope of section 127 of the Insolvency Act 1986 and which were made after the winding-up petition was presented, are automatically void unless the court orders otherwise. 

In such circumstances, the liquidator is likely to seek that the recipient of the payment may be forced to repay the money to the company’s liquidator. 

In addition, any director who authorised the payment without seeking a validation order could face personal liability for the company’s losses if their action was deemed to be in breach of their fiduciary duty as a director. 

Any disposition of property or payment made by a bankrupt between the date when the bankruptcy petition is presented or a bankruptcy application is made, and the date the insolvent estate is vested in a trustee in bankruptcy is void, unless the court consents to the disposition before it is made or subsequently ratifies it. 

If an individual disposes of any assets without having first obtained a validation order, and a bankruptcy order is subsequently made, the trustee in bankruptcy may seek to recover the property or payment made.  We deal with validation orders both in the context of corporate and personal insolvency cases.