A Practical Guide to Bankruptcy Validation Orders

Payments made by the bankrupt to settle the petition debt

The restriction set out in section 284 impacts the bankrupt’s ability to settle the debt owed to the creditor who has presented the bankruptcy petition (known as the petitioning creditor) with their own funds. 

If a petitioning creditor accepts the debtor’s own funds in settlement, it risks having that money claimed back by a trustee in bankruptcy if another creditor is substituted as petitioner or given carriage of the petition and a bankruptcy order is subsequently made. 

If a bankruptcy order is made, the bankrupt's payment is void unless approved or ratified by the court.  In practice, in order to avoid the impact of section 284 in these circumstances, the petitioning creditor should only allow for the debt to be paid by a third party. 

Payments into an account

Payments made into an overdrawn account to reduce an individual’s indebtedness to a bank constitute dispositions of property and therefore are potentially vulnerable to challenge under section 284. 

Matrimonial property adjustment orders

In divorce proceedings, a property adjustment order can be made that transfers property from one party to another, most commonly from one spouse to the other. 

A trustee in bankruptcy may wish to challenge a property adjustment order as being a void disposition under section 284 of the Act.  Such challenges are very fact-specific, and much will depend on when the property adjustment and bankruptcy orders are made.

Under section 284 of the Act, any disposition of property will be void where it was made by the bankrupt after the presentation of a bankruptcy petition or the making of a bankruptcy application, and without the consent of the court. 

However, any property transferred before the presentation of a bankruptcy petition or the making of a bankruptcy application is not a disposition that would be void under section 284. 

However, such a transfer may still be vulnerable to an application by the trustee in bankruptcy to set it aside if it was a transaction at an undervalue (i.e., the property was transferred for significantly less than its true or market value, or for no consideration at all). 

What is a validation order?

A validation order is not a term formally used in the Act.  However, it refers to an order made under section 284 of the Act validating a disposition of property which would otherwise be void.  A validation order may either validate a specific transaction or validate a series of transactions. 

A validation order application can be made by the individual who has had a bankruptcy petition presented against them, or applied themselves to be made bankrupt, or any interested third party to a transaction with that individual. 

A validation order should be obtained where an individual wishes to dispose of an asset after a bankruptcy petition has been presented against them or where a creditor (including the creditor petitioning for bankruptcy) is to receive payment from the individual against whom a bankruptcy petition has been presented. 

It is best practice to seek a validation order before the disposition or shortly after it has been made. 

Procedure for obtaining a validation order

The relevant procedure is set out in paragraph 12.8 of the Practice Direction on Insolvency Proceedings and in Rules 12.1 to 12.13 of the Insolvency (England and Wales) Rules 2016.

The application is made by drafting and submitting to the court an application notice, draft order and witness statement. 

Unless exceptional circumstances apply, notice of the application should be given to the petitioning creditor, any creditor who has given notice to the petitioning creditor of their intention to appear at the hearing of the bankruptcy petition, any creditor who has been substituted as petitioning creditor and any creditor who has carriage of the bankruptcy petition. 

When will the court grant a validation order?

Applications for a validation order are very fact-specific, and therefore the court’s determination will depend on the circumstances and the supporting evidence set out in the application.

In general, the court will grant a validation order only where it is satisfied by credible evidence that the individual who has had a bankruptcy petition presented against them is solvent and able to pay their debts as they fall due or that a particular transaction or series of transactions in respect of which the validation order is sought will be beneficial to or will not prejudice the interests of all the unsecured creditors as a class. 

In regard to retrospective validation orders, which are made by a recipient of property in order to avoid having to return the property to the trustee in bankruptcy, the court will try to balance the interests of the recipient of the property with the interests of the bankrupt’s creditors. 

In practice, the court is often prepared to validate retrospectively dispositions that were made both in good faith and before either the bankrupt or the recipient became aware that a bankruptcy petition had been presented.