If a company is wound up, the liquidator can force third parties to repay monies received by them from the company after the date the winding up petition was presented. This can cause all sorts of issues for businesses. Our expert team can help whoever you are.
If a company is wound up by the court, transactions made after the presentation of a winding up petition may be declared void.
This can create significant risk for directors and for third parties who received payment or assets during that period. Understanding how section 127 of the Insolvency Act 1986 operates is essential once a petition has been presented.
What is a voidable transaction?
When a winding up petition is presented, the winding up is treated as commencing from that date.
Section 127 of the Insolvency Act 1986 provides that any disposition of the company’s property made after the commencement of the winding up is void unless the court orders otherwise.
In practice, this means that payments made, assets transferred or shares altered after the petition date may later be unwound if a winding up order is made.
The rule exists to protect creditors as a whole. It prevents assets being moved or certain creditors being paid in priority once insolvency proceedings have begun.
Does this apply immediately after the petition is served?
Yes.
The risk arises from the date of presentation of the petition, not from the hearing date or the making of the winding up order.
This is why banks frequently freeze company accounts once they become aware that a petition has been issued. Payments made after presentation may be recoverable if the company is later placed into compulsory liquidation.
What are the consequences if transactions are void?
If a winding up order is made, the Official Receiver or appointed liquidator may seek recovery of assets or payments made after the petition date.
- Directors may also face scrutiny if they authorised payments knowing that a petition had been presented.
- In some circumstances, this may lead to claims for breach of duty or misfeasance.
Third parties who received payment may be required to repay it unless they can rely on statutory protections or obtain court validation.
How can voidable dispositions be avoided?
The primary mechanism for avoiding the risk is a validation order.
A validation order is a court order made under section 127 that authorises specific payments or permits continued trading despite the petition. If granted, the validated transactions cannot later be challenged as void.
Applications must be supported by detailed financial evidence demonstrating that the proposed payments do not prejudice creditors as a whole.
In some cases, a recipient of a payment may apply retrospectively for validation, although this is fact-sensitive and not guaranteed.
Are all post-petition transactions automatically recoverable?
Not automatically.
If the petition is dismissed, the risk falls away. In addition, third parties who acquired property in good faith and for value may have certain protections, particularly where security interests such as floating charges exist.
However, where a winding up order is ultimately made, the court will examine post-petition transactions closely.
Why early advice matters
Once a petition has been presented, routine business transactions carry legal risk.
Understanding the interaction between section 127 and the validation order process can prevent directors and counterparties from facing avoidable claims later.
If your company is subject to a winding up petition, or you have received payment from one that is, early advice can significantly reduce exposure.
For help with any issues arising from winding up petitions, company transactions or concerns about your position as a director of a business – call our expert team today and we can provide the assurance and help you need.
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