Companies that have had a winding up petition served upon it will usually have its bank account frozen by its bank. This is because section 127 of the Insolvency Act effectively makes any disposition of the company’s assets after commencement of winding up void unless the court otherwise orders.
A bank will freeze the bank account in order to protect its position because in theory a liquidator of the company can obtain an order to compel the bank to make up any loss from the bank account. the liquidator can in theory force the bank to make up any loss from the bank account. However, this leaves the company in a perilous position and severely damages the company’s ability to continue trading and wages/salaries may be unpaid even when money is held to pay them. A company may have (or be able to receive) funds to pay a petitioning creditor, but cannot as the bank will not (accept or) release funds.
We regularly assist companies facing frozen bank accounts. Our specialist insolvency solicitors & barristers seek to persuade the Court to grant Validation Orders. We will ensure you have the best possible chance of success in applying for a Validation Order.
What is a Validation Order?
Validation Orders are orders authorising the disposition of property made after the presentation of a winding-up or bankruptcy petition which would otherwise be void in the event of a winding-up or bankruptcy order being made. The legal departments of banks operating in the UK consider that ‘commencement’ is the date when a petition is advertised.
The practical effect of the advertisement is that as soon as banks become aware of the winding up petition they ‘freeze’ the company’s bank accounts as they are wary that the liquidator could require them to make good any financial loss. This damages the company’s ability to continue trading and wages/salaries may be unpaid even when money is held to pay them. A company may have (or be able to receive) funds to pay a petitioning creditor, but cannot as the bank will not (accept or) release funds.
What is the effect of a Validation Order?
A validation order will allow a company to continue to trade or perhaps dispose of a specific asset such as a property on the basis it has been determined these transactions are to the benefit of all creditors. The effect of validation order will vary dependant upon the terms of the order itself.
A validation order can be specific to allow certain payments in or out only (such as to employees or to certain suppliers) to allow trading to continue usually for a specific period such as the next hearing of the underlying petition. Alternatively a validation order can be general to validate transactions generally until the winding up petition is resolved; this allows the company to carry on trade normally.
What are the requirements for a successful Validation Order Application?
An application needs to be supported by strong evidence and persuasive legal argument. Validation Orders can only be made following (1) an application to the Court and (2) the hearing of that application. A validation Order application will not be dealt with by the Registrar at the date of hearing stated on your winding up petition; you must apply to the Court and seek a hearing before a Judge. 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.
The Chancellor of the High Court has issued a Practice Note on Validation Orders sought under sections 127 and 284 of the Insolvency Act 1986. The information required in the application will vary according to the circumstances and the nature of the relief sought, but is likely to include the following:
- The company’s name, trading and registered office address;
- The company’s nominal and paid up capital;
- Brief background details of the circumstances leading to presentation of the petition;
- Procedural history establishing how the company became aware of presentation of the petition;
- Whether the petition debt is admitted or disputed and, if the latter, brief details of the basis on which the debt is disputed;
- 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;
- A cash flow forecast and profit and loss projection for the period for which the order is sought;
- Details of the dispositions or payments in respect of which an order is sought;
- The reasons relied on in support of the need for such dispositions or payments to be made;
- Any other information relevant to the exercise of the court’s discretions;
- Details of any consents obtained from the petitioning creditor (supported by documentary evidence where appropriate).
- 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.
- Where the application involves a sale 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.
How might HMRC respond to a Validation Order?
If HMRC are the petitioning creditor they are likely to adopt a position on your company based on the purpose of the order and their attitude to your company which is dictated by the past payment relationship which we can assess with you. Generally HMRC’s response in these matters largely depends on the purpose for which the order is being sought and the trading history of the debtor company. HMRC may oppose an application if it would reduce the assets available for creditors. However they will need to balance this if the application is to release funds to allow payment of wages. Typically they will ask that payment of current PAYE/NIC is made on time. If the company needs to continue to trade or dispose of company property HMRC will need to consider if the position of creditors would be improved as result of granting the Validation Order.
Case study: Our Corporate Insolvency Lawyers Successfully Obtain Urgent Validation Order
We were instructed on an urgent basis from a company in the business of transporting cargo and merchandise. The company was served with a winding up petition in respect of a disputed debt of approximately £15,000.
The company required an urgent validation order to unfreeze its bank accounts so that it could continue trading and making day-to-day payments to its suppliers and its employees. Within three business days of being instructed by the company, we reviewed the company’s financial position, prepared and issued an application for a validation order along with a detailed witness statement evidencing the company’s strong financial position and a certificate of urgency.
The Judge sought further evidence in respect of the company’s financial sustainability, following which we prepared a second witness statement detailing the company’s financial position and enclosed the relevant documentations (which included the company’s profit and loss account and its financial accounts). Within 48 hours of issuing the application for a validation order, we convinced the court that a validation order should be granted in the terms sought by us. The Judge subsequently granted a validation order on paper and without a hearing, which is extremely rare and showcases the excellent work of our lawyers.
Our expert team later sought the dismissal of the winding up petition itself from the opponents and the company was awarded costs as a result. The work we did ensured the company could continue trading and there was no longer any winding up petition against the company.
Why use a Specialist Validation Order Solicitors?
The insolvency law and Court rules relating to Validation Orders are a technical minefield; as expert Validation Order solicitors we help our clients to avoid suffering the further trading losses as a result of frozen bank accounts. In addition, we assist by protecting the company’s interests and by negotiating with creditors and advising and representing the company at Court. Retaining insolvency solicitors and barristers in particular assists in dealings with creditors (such as HMRC) who will know a company is taking matters seriously and responsibly when they instruct ourselves.
Our Validation Order Solicitors get the best results
We endeavour to make the process as stress-free as possible for our clients and seek to eliminate the possibility of terminal business failure by loss of trading ability. We consider that each client’s case and business is unique, therefore we adopt a bespoke approach tailored to suit individual circumstances. We are a specialist City of London law firm made up of Solicitors & Barristers and based in the Middle Temple Inns of Court adjacent to the Royal Courts of Justice. We will be able to offer your company a fixed fee service to understand your circumstances then prepare, file and present a Validation Order application to the Companies Court at the Royal Courts of Justice (Rolls Building), or the relevant High Court District Registry or County Court with jurisdiction.
Free initial consultation and advice
If you are seeking a Validation Order or have an insolvency matter and need urgent help, advice or representation we are able to assist. Just call or email us now for a free initial consultation; our Validation Order team are waiting to help.
Please note: If you have been served a winding-up petition do not delay in contacting us as your matter can be handled more effectively (and the need for a validation order possibly avoided) the sooner you contact us.
Our Validation Order Experts are able to give specialist legal information and advice relating to validation orders and how to obtain one. To contact one of our Validation Order Solicitors or Barristers please click here or call 0207 1830 529.