What is a Validation Order and How can You Apply?
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.
Some companies do not attempt to resolve their financial problems until serious action has been taken by their creditors. This can be the case when a winding up petition is served. However, company directors or owners who decide now is the time to pay up or seek professional help, can get a nasty shock when they find their company bank accounts have been frozen.
In this case, the only real options for company directors are to pay the creditors out of their own pockets or apply for a validation order for the funds to be released via form 1AA.
Why are Bank Accounts Frozen?
Typically, company bank accounts are frozen when the winding up petition is advertised in the London Gazette. Until this time, the bank is unlikely to be unaware the company is trading insolvent. The reason the banks freeze accounts is it’s the law. Moreover, they do not want to be held responsible for any debts accrued during that time.
What is it?
A validation order is 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.
Who can Apply?
The directors and owners of a company that has been served with a winding up petition can apply for a validation order. However, parties involved in a transaction with a company that has had a winding petition served against it can also apply for a validation order to be made.
What are the Effects?
Rather than simply freeing up the company’s bank accounts so it can continue to trade, validation orders tend to be more specific. Typically, a validation order will only allow a company to continue with transactions it believes will be beneficial to its creditors. This includes:
• Particular transactions that would benefit employees or suppliers;
• Transactions that allow the company to continue to trade for such a period as the next hearing of the winding up petition;
• All the company’s transactions to allow a company to continue trading as normal until the winding up petition is resolved.
What Evidence and Information will the Court want to see?
To grant a validation order, the judge will want to see extensive evidence and information that will include, but is not limited to, the following:
• The reason why the winding up petition was served and the circumstances that surround it;
• Whether the debt owed by the company has been admitted or disputed. If the debt is being disputed, the judge will want to hear the reasons why;
• Full details of the company’s financial position. Details of assets and liabilities and any security and the amounts secured. These details should be supported, wherever possible, by financial documents such as company accounts, audited accounts and management accounts.
• A cash-flow forecast and profit and loss projection for the period the validation order is sought;
• The reason why the payments in question need to be made;
• Any other evidence that is relevant to the court’s decision. This could include a draft company voluntary arrangement (CVA) which is in the final stages of being drawn up.
How much does it cost to Apply?
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.
How can we help?
At Company Debt, we can provide the assistance you need to resolve company insolvency situations before they reach this stage. We can help draft company voluntary arrangements and put administration orders in place, or look at alternative methods of raising the finance you need.
Alternatively, 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.