Urgent injunctions can be sought against those presenting petitions to stop the winding up of a company or where it has already been issued to halt advertisement of the petition. These injunctions are designed to assist companies and the Courts in preventing abuse of the winding up process. Whilst not an injunction, where the petition has been publicised (and bank accounts have been frozen) a validation order can be sought from the Court to recover the company property and unfreeze a company bank account.
What is an injunction to stop a winding up petition?
A quia timet injunction prevents the issuance of a winding up petition if there has been abuse of process. If the court finds there has been an abuse of the proper process of the Court then it can restrain presentation and/or advertising of any winding up petition and/or strike out the petition altogether. Such an injunction is granted to prevent threatened and intended injury to the company i.e. not to involve the company in litigation which would constitute as an abuse of process.
What do you need to prove to obtain an injunction?
The court will grant an injunction restraining advertisement of a petition where the petition amounts to an abuse of process or is otherwise bound to fail. If there has been an abuse of process then the petition would be likely to fail. Examples of abuse of process are if there is a genuine and substantial dispute and a court claim is a more suitable course of action for the creditor, if the petition is bound to fail due to lack of law or evidence or if the granting of the winding up petition would be unfair or oppressive.
Examples of when a winding up petition is an abuse of process
Examples of circumstances in which a petition may be regarded as an abuse of process or bound to fail include:
- Where the alleged debt in respect of which the petition has been presented is genuinely disputed by the company on substantial grounds.
- Where the company has a genuine cross-claim or right of set-off based on substantial grounds for an amount either no less than £750 less than the petition debt, or equal to or exceeding the petition debt.
- Where the petition is bound to fail as a matter of law (for example, because the debt on which it is based is statute-barred) or as a matter of fact.
- Where the petition is oppressive or unfair to the company.
- Where the petition has been presented by the alleged creditor otherwise than for the purpose of getting the company wound up (a collateral purpose).
- Where the alleged creditor has another, more appropriate, remedy which he does not intend to pursue.
What is the procedure for seeking an injunction to restrain advertisement of a winding-up petition?
The procedure on an application for an injunction to restrain advertisement of a winding up petition is as follows:
- The application must be made by an application as prescribed by the Insolvency Rules.
- The application must be in writing and signed by the applicant or its solicitor.
- The application must be supported by evidence. This will normally take the form of a witness statement with exhibits. The statement should set out the grounds on which it is alleged that the petition amounts to an abuse of process or is bound to fail.
- The application must be listed before a judge.
Examples of Successful Applications to Restrain Winding-up Petitions
In Tallington Lakes Limited –v- South Kesteven District Council [2012] EWCA Civ 443, Etherton LJ refused permission to appeal the decision of Norris J dismissing an application for an injunction to restrain the presentation of a winding-up petition. Since a judgment debt was not paid or satisfied until the judgment creditor was in possession of cleared funds, interest had continued to run on the outstanding liability owed by the creditor until the cheque payment had not cleared through the company’s account (and not the date on which it was sent to the petitioner), by which date the interest due exceeded £750.
Lord Justice Etherton provided useful guidance as to when such an application may succeed:
“I have to emphasise, however, in this context that it is well established that the threshold for establishing that a debt is disputed on substantial grounds in the context of a winding up petition is not a high one for restraining the presentation of the winding up petition and may be reached even if, on an application for summary judgment, the defence could be regarded “shadowy”.”
Tallington Lakes Limited –v- South Kesteven District Council [2012] EWCA Civ 443
This is usefully guidance to parties defending or enforcing debts by means of statutory demands and winding up petitions in circumstances where it is possible that the debtor may have a defence, albeit a weak defence, in respect of the claimed debt. It is also useful guidance for parties seeking to restrain the presentation of winding up proceedings.
What is a Validation Order?
Validation Orders are court orders authorising the disposition of property made after the presentation of a winding-up or bankruptcy petition which would otherwise be void due to s127 IA:
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 127 Insolvency Act 1986
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.
Case study: Our Winding up Petition 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.
Instruct Winding-up Petition Expert lawyers
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 are experts in dealing with matters surrounding insolvency. We will be able to offer your company a fixed fee service to make a Validation 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. Whilst we are based in London we provide national coverage across all Courts in England & Wales. We offer free initial telephone advice on winding up matters.
Our Winding-Up Experts are able to give specialist legal information and advice relating to winding up matters and connected applications. To contact one of our Solicitors or Barristers please click here or call 02071830529.