A Validation Order is a court order that allows a UK company facing a winding-up petition to continue operating by authorising transactions that would otherwise be void.
Issued under Section 127 of the Insolvency Act 1986, a Validation Order effectively ‘unfreezes’ your company’s bank accounts, allowing certain financial activities to proceed.
In my experience, the court exercises considerable caution when considering applications for Validation Orders. To succeed, you must present credible evidence demonstrating that the proposed transactions will benefit or, at minimum, not prejudice the interests of the general body of creditors.
Typically, a Validation Order may authorise:
Payments in the ordinary course of business, including employee wages and supplier invoices
Specific dispositions of property deemed beneficial to creditors
Settlements with HMRC for outstanding tax liabilities
Transactions necessary for the preservation of company assets
Any person who can demonstrate a legitimate interest in a specific transaction involving the company’s property
How to Apply for a Validation Order?
Applying for a Validation Order requires meticulous preparation and adherence to strict procedural requirements. The following steps outline the process:
Draft a comprehensive witness statement to accompany Form IAA. This statement should provide a detailed exposition of your company’s financial position, including a full disclosure of assets, liabilities, and pertinent financial transactions.
Remit the requisite court fee, currently set at £155, to ensure the processing of your application.
Submit the completed Form IAA, witness statement, and any supporting documentation to the appropriate court. It is strongly advised to seek legal counsel to ensure the application meets all procedural requirements.
Upon submission, the court will schedule a hearing, typically within a short timeframe. Be prepared to present your case and respond to judicial inquiries regarding your company’s financial status.
Following the hearing, the court will either render a decision or indicate the need for further proceedings.
What Evidence is Needed to Get a Validation Order?
The case of Express Electrical Distributors Ltd v Beavis [2016] EWCA Civ 765 significantly raised the bar for obtaining Validation Orders. This Court of Appeal decision emphasised that such orders must strictly adhere to the pari passu principle – the cornerstone of insolvency law that requires equal treatment of creditors.
The court ruled that Validation Orders should only be granted in exceptional circumstances, specifically when the proposed transaction would benefit the general body of creditors as a whole. This marked a departure from previous practices where courts might have been more lenient.
Your application should include:
A detailed account of the circumstances leading to the winding-up petition and how your company became aware of it.
A clear statement regarding the petition debt, specifying whether it is admitted or disputed. If disputed, provide a succinct explanation of the grounds for dispute.
A comprehensive exposition of your company’s financial position, including:
A cash flow forecast and profit and loss projection for the period covered by the proposed order
Specific details of the transactions or dispositions for which you seek validation, accompanied by a cogent explanation of their necessity.
Any additional pertinent information that may influence the court’s decision, including any consents obtained from relevant parties, supported by documentary evidence.
In cases involving property disposition, provide comprehensive details of the property and an independent valuation to demonstrate that any proposed sale is at a proper value.
In urgent cases, particularly where immediate payments are essential for continued trading (e.g., wages), the court may consider granting limited relief even in the absence of comprehensive evidence. However, you must provide sufficient assurance that such relief will not prejudice creditors’ interests.
What’s the Cost of a Validation Order?
Obtaining a validation is an expensive process, which is why it’s far preferable to seek expert advice to help resolve a company insolvency situation before a winding up petition is served.
The costs of obtaining a validation order include the detailed preparation of a witness statement and legal representation from a barrister, who will need to address the court.
If you want to apply for a validation order, we can put you in touch with solicitors and barristers who can help. For more information, please get in touch with our team of company rescue specialists today for a cost and obligation-free discussion of your circumstances.
References
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