What is a validation order for UK companies?

Updated: 16th September 2021

Applying for a validation order to continue trading

A validation order is an order of the court that sanctions specific business transactions when that business is subject to a winding up petition. Essentially, it allows a company to operate under very strict supervision from the court.

Validation orders are designed to protect an insolvent company’s assets from unauthorised disposal, so protecting creditors as a whole. The court assesses the need for certain payments to be made, and may sanction or decline an application.

Validation orders and winding up petitions

If a company is experiencing extreme financial distress and a creditor petitions for its winding up, the process involves public disclosure of the business’ situation via an advert in the Gazette.

After a notice is placed, it’s typically only a matter of days before the company’s bank becomes aware of the situation. They then freeze the accounts to protect themselves, and this effectively prevents the business from trading.

The timescale for a company to act against a winding up petition is extremely limited, and the Gazette notice can be the final tipping point in some instances. It creates further complications for company directors, as from that point on, it’s unlawful to make any business transactions without the court’s authority.

If directors attempt to trade on, they can face serious repercussions including personal liability for company debts. Disqualification as a director for up to 15 years is also a serious possibility.

This is because creditor interests must be placed first when a business becomes insolvent. In a similar way, when the court assesses whether a transaction can be made they must consider the effect on creditors, and the potential for their financial position to worsen by making the transaction.

How do validation orders work for UK companies?

Validation orders allow some or all transactions to pass through a business’ bank account. Transactions sanctioned by the court might include staff wages, for example, or supplier payments.

The court must ensure the transactions will not be detrimental to creditors, and supporting evidence is required to this effect so a decision can be made. This type of evidence can include, but is not limited to:

  • Documentation that accurately represents the company’s financial position, including assets and liabilities, company accounts, and details of any security held on assets
  • Forecasts of cash needs, and profit/loss projections for the period of the validation order
  • If the debt is in dispute, evidence supporting this belief
  • An account of why the company is experiencing financial distress
  • A statement explaining why the payments stated in the application are required
  • If a Company Voluntary Arrangement (CVA) is in progress, the draft CVA should also be included

How to apply for a validation order

Under Section 127 of the Insolvency Act, company directors can apply for a validation order using form IAA, but anyone with an interest in a transaction can also make an application. Form IAA must be sent to the court along with a witness statement detailing the company’s assets and liabilities, and a payment of £155.

Once the application is received, a hearing is arranged and the company’s case presented at court. A decision may be handed down at the end of this hearing, or the court may need to see further evidence of the company’s situation.

Various outcomes are possible following the hearing, including:

  • Sanctioning specific transactions, such as payments to employees
  • Allowing all transactions to pass through the company’s bank account for a specified period
  • Removing restrictions completely – perhaps with a view to a Company Voluntary Arrangement being formalised

Acting quickly is vital when a winding up petition is presented at court. If you can act before the petition is publicly advertised in the Gazette, the company stands a better chance of survival.

Presenting a draft CVA that is viable for the company and optimises creditor interests could save the business, for example, and allow directors to carry on trading under a formal instalment plan that protects them from further action by creditors.

Real Business Rescue can provide the specialist insolvency support you need if your company is struggling. It’s imperative to act quickly under these circumstances, and particularly so if creditors are threatening legal action.

Please get in touch with our partner‐led team to arrange a free, same‐day consultation. We operate a broad network of offices throughout the UK, and can reliably provide your best options.

Keith Tully

Partner

0800 644 6080
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