A validation order is a legal order that allows certain transactions to be made into or out of a bank account that has been frozen by the court.
Validation orders can be used to allow payments that are essential to the company’s business, such as payroll or rent, to be made into the account.
To apply for a validation order, you will need to make an application to the court that granted the freezing order and provide evidence that the transactions you are seeking to make are necessary for the company’s business and are in the best interests of the company and its creditors.
It is important to note that validation orders are not granted automatically and the court has the discretion to decide whether or not to grant the order.
If you are seeking to apply for a validation order, it is recommended that you seek legal advice to ensure that you have a strong case and to understand the requirements of the process.
Applying for a validation order after a winding up petition
If you find yourself in the precarious position where a winding up petition has been served against your business, the future of your company is at serious risk. A winding up petition is typically served by a creditor, such as a supplier or HMRC when it believes the liquidation of your company is the only way it will receive the money it is owed.
If you are reading this article, the chances are you have not only received a winding up petition but, as a consequence of that process, your bank account has been automatically frozen. In this case, your only real options are to pay the creditors out of your own pockets or apply for a validation order. This article will explain more about validation orders and the process for obtaining one.
An application can be heard by the court but the Judge will need extensive evidence as to why the Court should grant the order. The evidence and information the Court will require is generally but not limited to the following;
- Why the petition was issued and what the circumstances were.
- 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
What evidence is needed to get a validation order?
The following information is typically needed when seeking a validation order:
- Notice given to the relevant parties and when it was given
- The location of the company’s registered office
- The company’s nominal and paid-up capital
- A summary of the circumstances leading to the presentation of the winding-up petition
- How the company became aware of the petition
- Whether the petition debt is admitted or disputed, and if it is disputed, a brief explanation of the basis for the dispute
- Detailed information about the company’s financial position, including assets (with details about any security and the amount secured), liabilities, and supporting documents such as filed accounts, draft audited accounts, management accounts, or an estimated statement of affairs
- A cash flow forecast and profit and loss projection for the period for which the order is sought
- Details about the dispositions or payments for which the order is being sought
- The reasons for needing to make these dispositions or payments and any other relevant information
- Information about any consents obtained from relevant parties (with supporting documents if available)
- Details about any relevant bank accounts, including account numbers, bank addresses and sort codes, and credit or debit balances at the time of the application
In cases where an urgent application is needed to make essential payments (such as wages) and not all of the above information is available, the court may consider granting limited relief for a short period. However, there must be sufficient evidence to show that the interests of creditors will not be prejudiced.
If the application involves the disposition of property, the court will need details about the property (including the title number for land) and assurance that any proposed disposal is at a fair value. An independent valuation should be provided as part of the evidence.
The court will need to see credible evidence that the company is solvent and able to pay its debts as they come due, or that a particular transaction or series of transactions being sought in the validation order will not harm the interests of unsecured creditors as a group.
A draft of the requested validation order should be included with the application.
Similar considerations apply to applications seeking the ratification of a transaction or payment after the issuance of a winding-up order.
Who makes the decision to unfreeze the bank account
The decision to unfreeze a company’s bank accounts with a validation order is typically made by the court that granted the freezing order. The company can apply to the court for a validation order, which is a legal order that allows certain transactions to be made into or out of the account. The court will consider the application and may grant the validation order if it determines that the transactions are necessary for the company’s business and are in the best interests of the company and its creditors.
It is important to note that validation orders are not granted automatically and the court has the discretion to decide whether or not to grant the order. If the court grants the validation order, it will specify the transactions that are allowed to be made into or out of the account and may impose conditions on the order, such as requiring the company to provide regular reports on its financial position.
If the court grants the validation order, the company’s bank accounts will be unfrozen to the extent that the order allows. However, the freezing order will remain in place until the winding up process is complete or the court lifts the 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.
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
Who pays the costs of a validation order?
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.
Conclusion
If your company’s bank account has been frozen due to a winding up petition, you may need to apply for a validation order to unfreeze the account. A validation order is a legal order that allows certain transactions to be made into or out of the account, which can be essential for the company’s business operations. Without a validation order, the company may be unable to make necessary payments, such as payroll or rent, which could lead to further financial hardship and damage the company’s reputation.
By applying for a validation order, you can ensure that the company has access to the funds it needs to continue operating and preserve its assets, which may be necessary to avoid insolvency or the winding up process.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.