It’s not often we ask directors to personally fund costs of legal services following the issue of a winding up petition, but it is a necessary move given s.127(1) of the Insolvency Act 1986. For those not in the know, this section states that;
“In a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is, unless the court otherwise orders, void.”
In plain English, and we very often have to explain this to our director clients, from the moment winding up proceedings commence, any disposition of the company’s property or transfer of shares is void unless the court has granted a validation order (see my blog from 28 November 2024, on validation orders here.
For this reason, and because the outcome of the petition remains uncertain at the point of engagement, as a precautionary measure, we ask directors to not meet our costs from company funds until a validation order is in place, and we are typically instructed to apply for one following the advertisement of the petition in the London Gazette.
We’ve found directors appreciate the point and often will fund the company’s litigation from either their personal resources, or from other businesses they have an interest in (often associated but sometimes independent companies). I should mention that it is not always necessary to fund petition defences from alternative resources, because an application can be made to the court before the petition is advertised. More on this in a follow up blog post.
Whilst I have your attention, in a somewhat related matter, having just read a report by @Kingsley Napier, it occurred to me to highlight the recent costs judgment case of Re MPB Developments Ltd [2025] involving an order that the directors be held personally liable for the costs incurred by the petitioner in a decision based partly on the basis of a non-party costs order (“NPCO”).
By way of background, the High Court found MPB Developments Ltd to be balance sheet insolvent, leading to a winding-up order. The court determined that the company’s liabilities significantly exceeded its assets and that its business plans were unrealistic and lacked viability, especially in relation to repaying substantial loans due in 2029. This decision highlights the importance of realistic financial forecasts and asset valuations in insolvency proceedings, emphasising that the court scrutinises business plans and financial evidence to assess a company’s future solvency[1].
The costs in MPB is why I recommend professional colleagues and directors consider as the outcome in this case will, and dare I say, should inform the decision making process when it comes to defending petition proceedings particularly where there is genuine concern regarding the basis for the litigation (we’ve seen our fair share).
In case you don’t have time or the inclination to read the costs judgment in full, then how about taking a look at the excellent summary of facts published by Kinglsey Napier here.
It would seem directors have a lot more to think about than just preventing the petition from being advertised and/or defending the proceedings. If you find yourself in this predicament, feel free to reach out to me for a discreet and non-obligatory chat to discuss your options when faced with the receipt of a petition and what to consider as a director(s) when taking action to respond.
Photo by Melinda Gimpel on Unsplash
[1] Creston Estates Ltd & ORS v MPB Developments Ltd & ORS [2025] EWHC 198 Ch).
