What is a Validation Order and How can You Apply?
A Validation Order is a court order that allows a UK company facing insolvency to continue trading and making transactions even after a winding-up petition has been filed against it.
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.
The validation order essentially “unfreezes” a company’s bank accounts and authorises certain types of payments and transactions, such as:
- Payments in the Ordinary Course of Business: This includes routine financial activities necessary for daily operations. It covers payments to and from the company’s bank account, such as salaries to employees, payments to suppliers, and settlements with other creditors.
- Transactions with HMRC: The company can make necessary payments to Her Majesty’s Revenue and Customs (HMRC), which might include tax liabilities and other statutory dues.
- Dispositions of Property: The company is allowed to carry out transactions involving its property, provided these are in line with its ordinary course of business. This ensures the company can continue to manage its assets effectively without contravening legal stipulations.
- Specific Beneficial Transactions: The order may also permit certain isolated transactions that are deemed beneficial to the company. These are typically exceptional transactions that are not part of regular business activities but are considered necessary for the company’s welfare or financial health.
Who Can Apply?
In the UK, typically, the following parties can apply for a Validation Order:
Anyone with a significant interest in a company can apply for a Validation Order. This includes:
- The Company’s Directors: They usually apply for the order to keep the company running during insolvency proceedings.
- Creditors: Sometimes creditors apply if they think it will help get their debts paid.
- Other Interested Parties: Rarely, shareholders or others closely involved with the company might apply if they have a strong reason related to the company’s well-being.
The application for a Validation Order is made to the court, and the party applying must provide sufficient evidence to justify why the order should be granted. This includes demonstrating that the transactions for which validation is sought are necessary for the continued operation of the business and are in the best interests of the creditors and the company as a whole.
How to Apply for a Validation Order?
When applying for a Validation Order, it’s important to present a thorough and well-documented case to the court. Here are the key elements you need to include:
Download Form 1AA: Download Form 1AA from the UK government’s official website. You can find it here or obtain it through your legal advisor. This form is crucial for your application.
Prepare the Witness Statement: Alongside Form 1AA, prepare a detailed witness statement. This should include a comprehensive overview of your company’s financial situation, including current assets, liabilities, and any relevant financial transactions.
Pay the Application Fee: The application process requires a fee of £155. Make sure this is paid to ensure your application is processed.
Submit Your Application: Once you have filled out Form 1AA and prepared your witness statement, submit these documents to the court. It’s advisable to seek legal guidance to ensure everything is in order.
Attend the Court Hearing: After submitting your application, a court hearing will be scheduled, usually within a few days. Be prepared to present your case and answer any questions regarding the financial status of your company.
Await the Decision: Following the hearing, the court will deliberate and then provide a decision on your application. This could either be a direct decision or an indication that a further hearing is required.
Remember, this process is about demonstrating the necessity of the transactions you wish to validate and reassuring the court about the viability of your business operations.
What Evidence is Needed to Get a Validation Order?
When applying for a Validation Order, you’ll need to present a comprehensive and well-structured case to the court.
The application should clearly outline the circumstances leading to the winding-up petition and how your company became aware of it. Address the status of the debt at the centre of the petition, specifying whether it’s admitted or disputed, and if disputed, provide a concise explanation.
A critical part of your application is a detailed representation of your company’s financial position. This includes information on assets and liabilities supported by relevant financial documents such as filed accounts or management accounts. Also crucial are a cash flow forecast and a profit and loss projection for the period for which you are seeking the order.
Specify the transactions or dispositions you need the order for, and explain why these are necessary. Include any additional information that could influence the court’s decision, such as consents obtained from relevant parties supported by documentary evidence.
In urgent cases where immediate payments are essential for continued trading, such as paying wages, the court may consider granting limited relief even if all the detailed evidence isn’t available. However, you’ll need enough evidence to assure the court that this won’t prejudice the interests of creditors.
If the application involves property disposition, include comprehensive details about the property, ensuring you have an independent valuation to confirm that any sale is at a proper value.
Finally, the court needs credible evidence that either the company is solvent and can pay its debts, or that the specific transactions will benefit or at least not harm the interests of all unsecured creditors. Attaching a draft of the validation order you seek is also advisable.
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 in the form of a barrister, who will need to be briefed and address the court.
If your company accounts have been frozen, you will need to carefully consider how these costs will be paid.