Validation Orders – Pepperells Insolvency Department

When a company is served with a Winding Up Petition, they are then faced with the prospect of a winding up order being made by the Court, which forces them into compulsory liquidation (this is to forcibly shut them down). After winding up proceedings have commenced, a notice is typically posted in the Gazette alerting creditors of the ongoing insolvency proceedings. Once creditors become aware of the petition, banks will usually freeze the company’s bank account in order to protect themselves, as the Insolvency Act effectively makes any disposition of the company’s assets after commencement of winding up void unless the court otherwise orders. This can have a serious negative impact on the business as it will be extremely difficult to trade without a company account. Though, it is important to know that even if your company has been issued with a Winding Up Petition, there is still an option you can take, in the form of a Validation Order.

What is a Validation Order?

A Validation Order is a type of court order which is applied for by a company when they have been issued with a Winding Up Petition by the Court. A Validation Order, if granted, provides a company with the necessary Court approval (validation) to continue trading legally, essentially unfreezing the bank accounts, despite being served with a winding up petition. . This allows most, if not all, business transactions to recommence. Supporting evidence is required for the application, including but not limited to:

1. Whether the petition debt is disputed and why;
2. Details of the company’s financial position including details of its and liabilities;
3. A cash flow forecast and profit and loss projection for the period for which the order is sought;
4. Details of the dispositions or payments in respect of which the validation order is sought;
5. The reasons relied on in support of the need for such dispositions or payments to be made.

What are the advantages of obtaining a Validation Order?

Validation Orders hold a variety of advantages to a business and its creditors, alongside any other parties that retain an interest in the company. The advantages vary from case to case but typically include:

1. Allows the company to continue trading and generating profits;
2. Allows for business transactions to go through the accounts, including but not limited to the payment of taxes, payment of salaries to staff and fulfilling contractual obligations with suppliers;
3. The lifting of any monetary restrictions until the future of the business has been determined through insolvency proceedings.

Consequences of not obtaining a Validation Order?

If a company fails to apply for and obtain a Validation Order to allow the legal continuation of trading, there can be serious ramifications for the directors of the company and its creditors , if the company is then liquidated. . Similar to the advantages, the consequences of failing to obtain a Validation Order vary dependent on the case facts but typically include:

1. If payments cannot be made to a supplier, the supplier will then be entitled to stop delivering their goods or services to the company due to non-payment. A similar scenario could occur should employees not be compensated for the hours they have worked.
2. If it becomes public knowledge that a company is being liquidated and you have not been able to continue trading, this can lead to negative publicity which bears the burden of losing vital customers should you reopen at a later date.
3. A liquidator can bring claims against the directors and/or recipients of monies to recover those funds.

Pepperells Solicitors Insolvency Department can assist you if your company is subjected to a Winding Up Petition. Please contact a member of our team to arrange a consultation.