What is a Validation Order for a frozen business bank account?

How to apply for a Validation Order to unfreeze a business bank account

While many company directors will be aware of the severity of being issued with a winding up petition (WUP), what takes some by surprise is coming into work to find that their bank accounts have been frozen. This action is a standard part of the WUP process with banks typically freezing accounts once the WUP has been advertised in the Gazette in order to shield against further financial losses.

Section 284 of the Insolvency Act 1986 states that any transaction undertaken an insolvent company from the issuing of a WUP, up until the time of its liquidation, is classed as a voidable disposition. This means that should a business which has been presented with a WUP continue to use their company bank account, running up liabilities in the process, these transactions will be subsequently seen as void and the bank will have to foot the bill for the loss incurred. Due to this it is within the bank’s interest to ensure these accounts are frozen at the earliest possible opportunity.

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Ramifications of a frozen business bank account

In essence, a frozen bank account puts an end to further trading at least in the short term as without a functioning bank account there is not a realistic possibility of carrying on business. Although it is true that all trading should cease during insolvency, there are times when a creditor may issue a WUP believing your company to be insolvent when in fact it is just temporarily short of funds. Unfortunately without access to company funds it can be difficult to mount a legal defence in order to appeal or dispute the WUP.

There is a way to unfreeze company bank accounts, however, and this is done through what is known as a Validation Order.

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What is a Validation Order?

A Validation Order is issued by the court which permits any future transactions by the company to remain valid, regardless of the active WUP. This allows the banks to unfreeze all or a portion of your funds as they will no longer be held responsible for any financial losses.

On issuing a Validation Order the court may place some restrictions on the funds held in the company bank accounts. A common restriction is stating that the money can only be used for specific purposes such as paying workers or certain creditors (usually the petitioning party or HMRC). Alternatively the order can be a general lifting of the freeze. There is a specific process and procedure to follow when applying for a Validation Order.

Making an Application for a Validation Order

Unfortunately, as with most things which require legal intervention, applying for a Validation Order can is not always a straightforward process. Certain information will be required by the court, but this can vary from one case to the next. However, most often the application will ask for:

   1.   The name of the company along with the trading and registered address
   2.   A brief but detailed background on the circumstances leading up to the WUP being presented
   3.   The state of the company’s paid up and nominal capital
   4.   When the directors were made aware of the WUP
   5.   Complete details as to the company’s financial status in terms of assets and liabilities (debts)
   6.   Whether the WUP is being disputed or agreed
   7.   Forecast for the financial future of the company including a cash flow prediction
   8.   Any other information as requested by the court

This is by no means a complete list but it gives a broad idea of just what is required when making an application for a Validation Order to unfreeze accounts. When HMRC is the creditor who has petitioned to wind up your company, there may be even more required of you in terms of what the court will ask for. Not only will this complicate the process enormously but it will also be harder to fight.

It must be said here that Validation Orders are only awarded to companies who can provide a compelling reason why one should be granted. If your company is clearly insolvent and with very little possibility of a turnaround being achieved it is highly unlikely that a Validation Order will be approved. If this is the case you may have to consider the very real possibility of your company being forced into liquidation. Due to this it is vital you seek expert help and advice upon a WUP being issued against your company.

Real Business Rescue has years of experience in guiding clients through the Validation Order application process. Contact us today for a free consultation if you are faced with frozen bank account so that we can advise you on your best steps moving forward. An insolvency specialist is on hand to answer any questions you may have.