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PRACTICE NOTE: VALIDATION ORDERS

PRACTICE NOTE: VALIDATION ORDERS (SS.127 AND 284 INSOLVENCY ACT 1986)

The following Practice Note was issued by the Chancellor of the High Court on 11 January 2007.

Companies

1. Section 127(1) of the Insolvency Act 1986 provides:

‘In a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is, unless the court otherwise orders, void.’

Section 129(2) of the Insolvency Act 1986 provides that:

‘[T]he winding up of a company by the court is deemed to commence at the time of the presentation of the petition for winding up.’

2. A company against which a winding-up petition has been presented (‘the company’) may apply to the court after presentation of the petition for relief from the effects of the foregoing provisions by seeking an order that a disposition or dispositions of its property, including payments out of its bank account (whether such account is in credit or overdrawn), shall not be void in the event of a winding-up order being made on the hearing of the petition (a ‘validation order’).

3. In accordance with the Practice Note on the Hearing of Insolvency Proceedings of 23
May 2005 [2005] BCC 456, [2005] BPIR 688 an application for a validation order should generally be made to the registrar or district judge. An application should be made to the judge only (a) where it is urgent and no registrar or district judge is available to hear it, or (b) where it is complex or raises new or controversial points of law, or (c) is estimated to last longer than 30 minutes.

4. Save in exceptional circumstances, notice of the making of the application should be given to (a) the petitioning creditor, (b) any person entitled to receive a copy of the petition pursuant to r.4.10 of the Insolvency Rules 1986, (c) any creditor who has given notice to the petitioner of his intention to appear on the hearing of the petition pursuant to r.4.16 of the Insolvency Rules 1986, and (d) any creditor who has been substituted as petitioner pursuant to r.4.19 of the Insolvency Rules 1986.

5. The application should be supported by written evidence in the form of an affidavit or witness statement which, save in exceptional circumstances, should be made by a director or officer of the company who is intimately acquainted with the company’s affairs and financial circumstances. If appropriate, supporting evidence in the form of an affidavit or witness statement from the company’s accountant should also be produced.

6. The extent and contents of the evidence will vary according to the circumstances and the nature of the relief sought, but in the majority of cases it should include, as a minimum, the following information:

(a) when and to whom notice has been given in accordance with paragraph 4 above; (b) the company’s registered office;
(c) the company’s nominal and paid up capital;
(d) brief details of the circumstances leading to presentation of the petition; (e) how the company became aware of presentation of the petition;
(f) whether the petition debt is admitted or disputed and, if the latter, brief details of the basis on which the debt is disputed;
(g) full details of the company’s financial position including details of its assets (including details of any security and the amount(s) secured) and liabilities, which should be supported, as far as possible, by documentary evidence, e.g. the latest filed accounts, any draft audited accounts, management accounts or estimated statement of affairs;
(h) a cash flow forecast and profit and loss projection for the period for which the order is sought;
(i) details of the dispositions or payments in respect of which an order is sought;
(j) the reasons relied on in support of the need for such dispositions or payments to be made;
(k) any other information relevant to the exercise of the court’s discretion; and
(l) details of any consents obtained from the persons mentioned in paragraph 4 above
(supported by documentary evidence where appropriate).

7. Where an application is made urgently to enable payments to be made which are essential to continued trading (e.g. wages) and it is not possible to assemble all the evidence listed above, the court may consider granting limited relief for a short period, but there should be sufficient evidence to satisfy the court that the interests of creditors are unlikely to be prejudiced.

8. Where the application involves a disposition of property the court will need details of the property (including its title number if the property is land) and to be satisfied that any proposed disposal will be at a proper value. Accordingly an independent valuation should be obtained and exhibited to the evidence.

9. The court will need to be satisfied by credible 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 in respect of which the order is sought will be beneficial to or will not prejudice the interests of all the unsecured creditors as a class (Denney v John Hudson & Co Ltd [1992] BCLC 901, [1992] BCC 503, CA; Re Fairway Graphics Ltd [1991] BCLC 468).

10. A draft of the order sought should be attached to the application.

Individuals

11. Section 284 of the Insolvency Act 1986 provides, inter alia:

‘(1) Where a person is adjudged bankrupt, any disposition of property made by that person in the period to which this section applies is void except to the extent that it is or was made with the consent of the court, or is or was subsequently ratified by the court.

(2) Subsection (1) applies to a payment (whether in cash or otherwise) as it applies to a disposition of property and, accordingly, where any payment is void by virtue of that subsection, the person paid shall hold the sum paid for the bankrupt as part of his estate.

(3) This section applies to the period beginning with the day of the presentation of the petition for the bankruptcy order and ending with the vesting, under Chapter IV of this Part [of the Act], of the bankrupt’s estate in a trustee.’

12. A person against whom a bankruptcy petition has been presented (‘the debtor’) may apply to the court after presentation of the petition for relief from the effects of the foregoing provisions by seeking an order that any disposition of his assets or payment made out of his funds, including any bank account (whether it is in credit or overdrawn), shall not be void in the event of a bankruptcy order being made on the petition (a ‘validation order’).

13. In accordance with the Practice Note on the Hearing of Insolvency Proceedings of 23
May 2005 [2005] BCC 456, [2005] BPIR 688 an application for a validation order should be made to the registrar or district judge.

14. Save in exceptional circumstances, notice of the making of the application should be given to (a) the petitioning creditor(s) or other petitioner, (b) any creditor who has given notice to the petitioner of his intention to appear on the hearing of the petition pursuant to r.6.23 of the Insolvency Rules 1986, (c) any creditor who has been substituted as petitioner pursuant to r.6.30 of the Insolvency Rules 1986, and (d) any creditor who has carriage of the petition pursuant to r.6.31 of the Insolvency Rules 1986.

15. The application should be supported by written evidence in the form of an affidavit or witness statement which, save in exceptional circumstances, should be made by the debtor. If appropriate, supporting evidence in the form of an affidavit or witness statement from the debtor’s accountant should also be produced.

16. The extent and contents of the evidence will vary according to the circumstances and the nature of the relief sought, but in a case where the debtor is trading or carrying on business it should include, as a minimum, the following information:

(a) when and to whom notice has been given in accordance with paragraph 14 above
(b) brief details of the circumstances leading to presentation of the petition
(c) how the debtor became aware of the presentation of the petition;
(d) whether the petition debt is admitted or disputed and, if the latter, brief details of the basis on which the debt is disputed;
(e) full details of the debtor’s financial position including details of his assets (including details of any security and the amount(s) secured) and liabilities, which should be supported, as far as possible, by documentary evidence, e.g. accounts, draft accounts, management accounts or estimated statement of affairs;
(f) a cash flow forecast and profit and loss projection for the period for which the order is sought;
(g) details of the dispositions or payments in respect of which an order is sought;
(h) the reasons relied on in support of the need for such dispositions or payments to be made;
(i) any other information relevant to the exercise of the court’s discretion;
(j) details of any consents obtained from the persons mentioned in paragraph 14 above
(supported by documentary evidence where appropriate).

17. Where an application is made urgently to enable payments to be made which are essential to continued trading (e.g. wages) and it is not possible to assemble all the evidence listed above, the court may consider granting limited relief for a short period, but there should be sufficient evidence to satisfy the court that the interests of creditors are unlikely to be prejudiced.

18. Where the debtor is not trading or carrying on business and the application relates only to a proposed sale, mortgage or re-mortgage of the debtor’s home evidence of the following will generally suffice:

(a) when and to whom notice has been given in accordance with paragraph 14 above
(b) whether the petition debt is admitted or disputed and, if the latter, brief details of the basis on which the debt is disputed
(c) details of the property to be sold, mortgaged or re-mortgaged (including its title number)
(d) the value of the property and the proposed sale price, or details of the mortgage or remortgage
(e) details of any existing mortgages or charges on the property and redemption figures
(f) the costs of sale (e.g. solicitors’ or agents’ costs)
(g) how and by whom any net proceeds of sale (or sums coming into the debtor’s hands as a result of any mortgage or re-mortgage) are to be held pending the final hearing of the petition

(h) any other information relevant to the exercise of the court’s discretion
(i) details of any consents obtained from the persons mentioned in paragraph 14 above
(supported by documentary evidence where appropriate).

19. Whether or not the debtor is trading or carrying on business, where the application involves a disposition of property the court will need to be satisfied that any proposed disposal will be at a proper value. Accordingly an independent valuation should be obtained and exhibited to the evidence.

20. The court will need to be satisfied by credible evidence that the debtor is solvent and able to pay his debts as they fall due or that a particular transaction or series of transactions in respect of which the order is sought will be beneficial to or will not prejudice the interests of all the unsecured creditors as a class (Denney v John Hudson & Co Ltd [1992] BCLC
901, [1992] BCC 503, CA; Re Fairway Graphics Ltd [1991] BCLC 468).

21. A draft of the order sought should be attached to the application.

Ratification of transactions

22. Similar considerations to those set out above are likely to apply to applications seeking ratification of a transaction or payment after the making of a winding-up order or bankruptcy order.

Our team of expert Barristers & Solicitors is able to advise and assist your company in obtaining a Validation Order. Contact us by clicking here or calling 0845 8622 529.

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