Pre-emptive validation orders in insolvency proceedings
Advanced warning; I’m about to bang on (again) about s.127(1) of the insolvency Act 1986, and what it means for companies faced with the presentation of a winding up petition.
For those not in the know, this section makes potentially void, any payment (or as the legislation states ‘disposition’) of any asset or payment by the company, void from the date the petition is presented, which arguably is the date on the sealed court papers, not the date of service.
Directors, unaware of this, will typically continue to access and disburse funds from the company’s account(s) until the petition is advertised in the London Gazette, the account frozen following which the likes of me are instructed to assist with an application to the insolvency courts for interim relief, otherwise known as a validation order.
Why the blog? Well, finally, after many years of acting in this space for clients on a post advertising basis, a client decided to get ahead of the curve and not wait until its bank account was frozen, and instructed us to act in advance of the publication, a sensible move, given there is nothing in the legislation that suggests an application can’t be made before the advertisement. The validation order was granted and has been sent on to its bank’s legal team despite the fact that the petition has yet to be advertised.
So, if you are served with a winding up petition, you do not necessarily need to wait until the Gazette publishes the fact; in the right circumstances, a judge in an insolvency court may be prepared to grant a validation order pending the outcome of the petition hearing, enabling your business continue with some semblance of normality whilst it looks to dealing with the the core issue of addressing the petition debt.
I am, as always, grateful to @Kartikeya Sharma of @23ES for his usual excellent advice and advocacy on behalf of our client and for a sterling skeleton argument on the merits of their validation order application.
