What is a Validation Order and How can You Apply?

Validation order insolvencyValidation orders are a court order which allows a company to continue trading by freeing up company accounts so that employees, key suppliers, HMRC and other creditors can be paid.

The court is cautious about making validation orders so it will need to see credible evidence that the order would benefit all the company’s creditors. 

As such, transactions that would reduce the level of assets available to creditors will not be validated.

What is Validation order?

A validation order is an order of the court that authorises and ‘validates’ transactions going through a business’ bank account, regardless of the fact that a winding up petition is ongoing.

The order essentially ‘unfreezes’ the account and allows certain, or in some cases, all transactions to go through. A company with a winding up petition made against it can apply for a validation order, but there may be circumstances in which other parties can also apply – if another entity has an interest in one of the transactions, for example.

What are the benefits of validation orders?

Validation orders hold a number of potential benefits to the business itself, its creditors, and other parties with a vested interest. Depending on individual cases, they may allow:

  • Specific transactions to go through the business’ bank accounts – these could include staff wages, for example, or supplier payments
  • The company to trade with no restrictions for a specific period of time, perhaps until the next court hearing
  • All restrictions to be lifted until the future of the business has been determined

The Decision to Unfreeze the Bank Accounts

If the courts make the validation order, you’ll receive a copy or the order. You need to present this to the bank to enable the bank account to be unfrozen. If the courts do not grant the order, it may be that you can appeal the decision. This is a difficult position as the court hearing for the winding up petition is likely to be quite soon and time is of the essence.

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;

  1. Why the petition was issued and what the circumstances were.
  2. Whether the petition debt is admitted or disputed and, if the latter, brief details of the basis on which the debt is disputed; 
  3. 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; 
  4.  A cash flow forecast and profit and loss projection for the period for which the order is sought; 
  5.  Details of the dispositions or payments in respect of which an order is sought;
  6. The reasons relied on in support of the need for such dispositions or payments to be made
  7. Any other information relevant to the exercise of the court’s discretions

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.

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