Validation order FAQs
What is a validation order?
- Payments to and from the company’s bank account in the ordinary course of business, including payments to employees, suppliers, HMRC and other creditors
- Dispositions of property in the company’s ordinary course of business
- Specific isolated transactions beneficial to the company
The court is cautious about issuing validation orders. It seeks to protect the interests of unsecured creditors and requires credible evidence that the order will benefit all of the company’s creditors. Transactions that would reduce the assets available to creditors are not validated.
Who can apply for a validation order?
The following parties may apply for validation orders:
- A company against which a winding-up petition has been presented
- Any interested party to a transaction with a company against which a winding-up petition has been presented
How do you apply for a validation order?
Other than in exceptional circumstances, you will need to notify the following parties that you are applying for a validation order:
(a) The person who filed the winding-up petition (the respondent)
(b) Any person entitled to receive a copy of the petition
(c) Any creditor who has given notice to the petitioner of his intention to appear on the hearing of the petition
(d) Any creditor who has been substituted as petitioner
Your application should be supported by a witness statement which is normally 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 a witness statement from the company’s accountant should also be produced.
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:
- When and to whom notice has been given
- The company’s registered office
- The company’s nominal and paid-up capital
- Brief details of the circumstances leading to the presentation of the winding-up petition
- How the company became aware of the presentation of the petition
- Where the petition debt is admitted or disputed and, if the latter, brief details of the basis on which it 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, eg 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 the 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 discretion
- Details of any consents obtained from the persons mentioned above (supported by documentary evidence where appropriate)
- Details of any relevant bank account, including its number and the address and sort code of the bank at which such account is held and the amount of the credit or debit balance on such account at the time of making the application
Where an application is made urgently to enable payments to be made which are essential to continued trading (eg wages) and it is not possible to assemble all of the evidence listed above, the court may consider granting limited relief for a short period. However, there will need to be sufficient evidence to satisfy the court that the interests of creditors are unlikely to be prejudiced.
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 included in the evidence.
The court will need to be satisfied by credible evidence either 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.
A draft of the validation order sought should be attached to the application.
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.
Where do you apply for a validation order?
An application for a validation order should be made to the same court that is dealing with the winding-up petition. For the High Court, the application is made to the Registrar; for county courts, it is made to the District Judge.
In certain circumstances, the application is made to the Judge:
1. Where it is urgent and no registrar or district judge is available to hear it;
2. Where it is complex or raises new or controversial points of law; or
3. The hearing is expected to last longer than 30 minutes
How is a validation order application served?
The application and evidence will need to be filed at court and served on the respondent as soon as practicable after it is filed and, in any event, unless it is necessary to apply ex-parte or on short notice, at least 14 days before the date fixed for the hearing.
Applications for validation orders should be served on:
- The petitioning creditor;
- Any liquidator appointed in an existing voluntary liquidation;
- Any administrator appointed in an existing administration order
- Any supervisor of a voluntary arrangement;
- Any administrative receiver;
- Any member state liquidator who has been appointed;
- The Financial Conduct Authority;
- Any creditor who has given notice to a petitioner of his intention to appear on the hearing of the petition pursuant to Rule 7.14 of the Insolvency (England and Wales) Rules 2016; and
- Any creditor who has been substituted as petitioner pursuant to Rule 7.17 of the Insolvency (England and Wales) Rules 2016.
The court does have power in cases of urgency to hear an application immediately with or without notice to the other parties.
The application may be sent by post provided it is addressed to the person it is to be served on. It may be sent to the last known address of the person to be served.
When should you apply for a validation order?
An application for a validation order can be made at any time either before or after the issue of a winding-up order against a company.
If the application is made before a company’s assets have been disposed of, an “antecedent” validation order is required. The court will only grant it if:
- The company is solvent and able to pay its debts as they fall due; or
- The transaction or transactions to be validated will be beneficial to or will not prejudice the interests of all of the unsecured creditors as a class
If the application is made after a disposition of the company’s assets, a “retrospective” validation order is required. Here the court will balance the interests of the recipient of the property with the interests of the company’s creditors at large. It is likely to grant the order in circumstances where the dispositions were made in good faith and before either the company or the recipient became aware of the winding-up petition.
When considering an application for a retrospective validation order, the court, in determining whether to grant it, will seek to balance the interests of the recipient of the property in question with the interests of the company's creditors. However, there is no guarantee that the order will be granted, even in circumstances where the disposition was made both in good faith and before either the company or the recipient became aware of the existence of the winding-up petition. It is therefore very important to take specialist advice when considering applying for a retrospective validation order.
What are the effects of a validation order?
A validation order allows a company to continue to trade or dispose of a specific asset - such as a property – if it has been determined by the court that these transactions will benefit all creditors.
The particular effects of each validation order depend on its terms, which vary. For example, while some validation orders are general, validating transactions at large until the winding-up petition is resolved, others:
- Only allow specific payments in and out of the company’s bank account (eg for the payment of employees or suppliers)
- Only allow trading to continue for a specific period of time, for instance, until the next hearing of the winding-up petition
As part of the application process, you can ask for the validation of payments by the company to its professional advisors to cover the costs of the validation order application itself. If this is granted, the winding-up court usually orders that the costs of the application are “in petition”. This means that if the winding-up petition is dismissed and no winding-up order is made, the petitioning creditor must pay the costs of the validation order application. However, the court may order that the applicant is liable for the cost of the application – this is particularly likely if the application is unsuccessful.