An increased need for validation orders?

The Court has recently published procedures that it will follow for upcoming hearings including winding up petitions. Further to our recent bulletins, although the Courts will still be trying to deal with some winding up and bankruptcy petitions by Skype or telephone many will still be adjourned.

One possible consequence of the lengthy adjournment of petitions is that debtor companies and individuals may require validation orders to make payments in the ordinary course of business or otherwise. Under sections 127 and 284 of the Insolvency Act 1986 any dispositions post presentation of a petition are void, unless ratified by the Court, if a winding-up/bankruptcy order is subsequently made.

The requirements for making an application seeking a validation order are set out in the Practice Direction for Insolvency Proceedings - principally at paragraph 9.11 (for companies) and paragraph 12.8 (for individuals). The practice direction helpfully lists what must be included in such an application.

Validation orders applications - Companies

For companies, the evidence needed in support is quite extensive in that the witness statement must include all the background to the petition and full details of the company’s financial position including its assets and liabilities, a cash flow forecast and profit and loss projection for the period for which the order is sought. The witness statement must also specify each and every payment that the company seeks to be validated as the Court is extremely unlikely to grant a blanket permission for the company to make any payments that it wishes to.

Where the application is being made by a company or an individual debtor who is trading, input from their accountant is likely to be required.

Validation orders applications - Individuals

For individual applications, the position is similar to that for a company where a debtor is trading or carrying on a business. Where the debtor is not trading or carrying on a business, and the application only relates to a proposed sale or remortgage of the debtor’s home for example, the debtor will need to provide information on the property including its value and details of existing mortgages. The principal concerns that the Court will have when considering an individual’s application for a validation order such as this are how the proceeds for that sale are to be held, how they are to be applied, and (where more than one asset is proposing to be sold) what will happen if only one asset sells and not the other.

Matters the Court will consider

The leading authority setting out the general principles the Court will consider when exercising its discretion as to whether to grant a validation order is Re: Grays Inn Construction Co Limited [1980] 1 WLR 711. In brief, the Court  will exercise its discretion in validating such transactions if the interests of unsecured creditors will not be prejudiced by the transaction taking place. The Court will bear in mind the pari passu principle and is unlikely to validate a transaction where there is no benefit to unsecured creditors. The evidence produced by the company or the debtor in support of their application is therefore critical as it will need to show to the Court why the transaction should be validated.

Practical issues – Arranging a hearing

Although the Court is at present adjourning non-urgent hearings, there is scope for urgent hearings to take place by Skype or telephone and a validation order application would usually fall into that category.

If you do have any clients who may need to make an urgent application for a validation order, please don’t hesitate to get in touch.