What is a validation order?
Once a company has been presented with a winding up petition, any disposition made by it of any of the company’s assets (including land and cash) will be void unless the court orders otherwise. In order to obtain permission of the court for a company to make further dispositions of the company’s assets or to unfreeze a company’s bank account, an application for a validation order will need to be made.
When might I need a validation order?
A validation order is required after the presentation of a winding up petition for any dispositions of company assets between the period starting from the presentation of the petition to the granting of the winding up order or dismissal of the petition entirely.
A validation order does not just cover transactions whereby the company disposes of cash or land, if the company’s accounts are frozen, then this will prevent the company from making payments to suppliers and employees, as well as, prevent payments being received into the account. This is likely to cause added significant disruption.
Any payments in and out of a company bank account (if the account is not frozen) or dispositions of property/assets without such an order from the court granting permission, may be at risk of being void and the transaction will be at risk of being reversed, or the directors of the company may be required to compensate the company for any losses.
How do I apply for a validation order?
An application for a validation order should be made to an Insolvency and Companies Court Judge, and notice of the application should be given to:
- The petitioning creditor;
- Any person who was entitled to receive a copy of the petition;
- Any creditors who are supporting the petition; and
- Any creditor who has been substituted as petitioner.
The application should contain witness evidence setting out why the disposition is being made and what implication the disposition would have on unsecured creditors. Usually, the witness evidence is presented in the form of a witness statement by a company director accompanied with witness evidence (and accounting information) from the company’s accountant.
What are the grounds for applying for a validation order?
The grounds for applying for a validation order can vary depending on why the order is sought and the financial circumstances of the company. However, broadly, the court will consider the following factors when considering whether or not to make a validation order:
- Whether the transaction or transactions to be validated will be beneficial to, or will not prejudice, the interests of all the unsecured creditors as a class. As a general rule, a validation order will only be made where there is no serious risk to creditors.
- The court must be satisfied that the disposals will be at a proper value (i.e ensure that no third party is being treated preferentially over any other creditor, thereby ensuring compliance of the “sharing principle”).
- The court will look at whether a company is solvent or insolvent. If a company is insolvent using the “cash flow test” but solvent using the “balance sheet test”, then the court will focus on trying to avoid paralysing a company from trading.
What if we have already made the disposition?
If a disposition has already been made by the company after the winding up petition has been issued and it has not applied for a validation order, then a retrospective validation order application may be considered either by the company or the recipient of the asset/funds.
When making an application of this nature, the court will consider the above factors and will try and balance the interests of the recipient of the asset/funds with the interests of the company’s creditors.
It is important to note that there should be no presumption that the disposition will be validated just because it was made in good faith. Therefore, it is important to get legal advice prior to making any dispositions rather than face the anguish of potentially having a disposition made void.
What should you do before calling?
You should consider what dispositions the company needs to make to enable it to continue trading. It would assist us to have the following details:
- Details of the regular payments in and out of the account in question;
- When these payments are due to be paid out or received, who to/from and how much;
- Details of the anticipated transaction (if relevant);
- Details of any one-off transactions which will also need to be considered; and
- A recent set of company accounts including a profit and loss account and a balance sheet.
Is it expensive? What are the likely costs?
We will provide you with an estimate of costs at the outset based on the type of work required and its urgency.
Our lawyers have extensive experience in advising clients who wish to apply for validation orders. We will be able to provide you with bespoke and cost effective advice tailored to your circumstances.