Once a winding-up petition advertisement has appeared in the London Gazette, then a company’s bank account is frozen as a matter of course. Should the company have to release funds from the account or make payments, then a Validation Order will need to be applied for.
The Validation Order application must be made at the Court where the petition is being heard and should be served on the petitioning creditor as well. Included with it should be a cash-flow forecast, a statement of affairs, a proposed list of payments and why they are necessary.
What is a Validation Order
If a bankruptcy or winding-up petition is issued to a debtor, it has the effect in practical terms of preventing the individual or company from disposing of any assets pending the Court hearing. Amongst other things it freezes all bank accounts. Permission to reactivate the bank account or dispose of an asset must be sought from the Court and backed up with reasons and confirmation that this will not be to the detriment of creditors. If agrees the Court will issue a Validation Order.
The Court needs to be convinced that the payments that are being made will be favourable to the creditors and the company. Reassurance is needed that the company’s assets are not going to be diluted. If, for instance direct debits, cheques or transfers are expected that will cover the debt owed, then, of course, this benefits both the company and the creditors.
- If one of the following scenarios is valid to the company and can be proved then a validation order has a better chance of approval:
- There is a likelihood of the petition being dismissed.
- The company is solvent and is able to pay the amount owed on the petition through money held at the bank or money that is due to be paid in.
If instances where the company has not got the funds to pay a valid debt, a validation order can still be approved where it is shown that a CVA is likely to get the approval of its creditors.
If at the petition hearing a company is wound up, if assets have been diluted and it was not agreed with by court, such transactions will not be valid and voided. In some cases, the directors disposing of the assets may have to pay the money back personally and could face criminal charges.
A company should seek advice from us if it has received a winding-up petition or is thinking about applying for a validation order.