The insolvency legislation dictates that any disposal of property after the presentation of a winding up petition, or indeed the presentation of bankruptcy petition against an individual, is void. This means that any void dispositions (payments post-issue of a winding-up petition) can be reversed once a bankruptcy order, or winding up order, is made by an insolvency practitioner or the official receiver. The legislation is designed to stop the directors of a company from stripping the company’s assets on receipt of a winding up petition. Please note, if payments are made after the issue of a winding-up petition and the company isn’t subsequently wound up, the payments are not void dispositions.
Void dispositions cover all sorts of assets owned by the company. The assets can include plant and machinery and office equipment to cash at bank, debtors and intellectual property. If you receive a winding up petition and are unable to contest or pay, as a director, you must abide by these restrictions in order to avoid liability. If a voidable transaction is made, you may be personally liable to compensate the estate if the asset cannot be recovered from the beneficiary.
When can I obtain a validation order?
The key part of the legislation is that transactions made after a winding up petition has been presented are void dispositions, unless the court orders otherwise. Consequently, it is possible to obtain a validation order to allow some payments to be made. While a winding up petition is outstanding, an application to court can be made to allow access to a frozen bank account. However, this will only be granted in certain circumstances. There will generally be restrictions on how the funds can be used:
- You intend to contest the petition and have grounds to do so.
- The transaction would not be detrimental to creditors.
- The transaction would be beneficial for creditors.
- The funds are to be used to pay the petition debt.
In short, the court will not generally grant a validation order that would have a detrimental effect on assets available for creditors after a winding up order has been made.
What is the process to obtain a validation order?
In order to apply for a validation order, you will likely need the assistance of a solicitor specialising in insolvency. Depending on your exit route from the winding up petition, you will need an insolvency practitioner. Your solicitor will prepare an application on your behalf and a witness statement to set out your evidence as to why the validation order should be granted. This will need to be comprehensive and include:
- Your version of events leading up to the winding up petition being issued.
- Whether you intend to oppose the winding up petition and the basis of your dispute.
- You’ll need to set out the company’s financial position with supporting documentation including: statement of assets and liabilities, last set of filed accounts, any management accounts, cash flow and profit & loss projections.
You’ll also need to provide:
- Details of the transactions which would otherwise be void payments or void dispositions.
- Evidence of how creditors will benefit from the otherwise voidable transactions being allowed.
- If the validation order is being sought to pay the petition debt, evidence that the company has the funds to may this and the debt of any supporting creditor.
- An independent valuation if assets are being sold to achieve a better return to creditors than if they were sold after the winding up order is made.
Your solicitor will, generally, liaise with the petitioning creditor prior to issuing the application to find out if they will oppose the validation order application. If they intend to oppose the application, even more evidence may be required to support your application. This will often be subject to additional scrutiny from HMRC winding up petitions.
In terms of costs of a validation order application, they are, unfortunately, significant. An uncontested application will, generally, cost at least £5,000, including court costs and barrister’s costs. This is attributable to the urgent nature of a validation order, with most applications having to be dealt with within a week. Court hearings are usually scheduled 6-8 weeks in advance, so urgent hearings of this nature bear additional costs to ensure they are reserved only for urgent matters.
If the court grants the validation order, you will either be able to regain access to your previously frozen bank account, or you will be permitted to make specific transfers of assets of funds as designated by the order.
Can I obtain a validation order retrospectively?
Historically, a number of parties have sought to obtain a validation order retrospectively when the liquidator or official receiver has sought to recover voidable transactions. Previously, transactions carried out in the normal course of business would be validated by the court retrospectively. However, recent case law has set a much higher standard.
Validation orders for potential void payments should be sought ahead of the payments being made. If not, there is a serious risk of liabilities on the recipient as well as personal liability on the director.
It is worth bearing in mind that a validation order is often a patch for a larger problem. Unless you are able to pay the petition debt, and continue to run your business as a going concern, you may wish to consider alternative insolvency procedures. You should do so ahead of the winding up order being made to take control of the situation. If you are having difficulties with a winding up petition and a frozen bank account, our business rescue experts can help you take the urgent action needed to resolve your situation.