What is a Validation Order?
If a company is wound up by the Court, under Section 127 of the Insolvency Act 1986 any disposition of that company’s property (and any transfer of shares or alteration in the status of that company’s members) made after the presentation of the winding up petition is void, unless the Court Orders otherwise.
The purpose of Section 127 is to:
- preserve the assets of the company for the benefit of all of its creditors once a winding up petition has been presented; and
- to avoid the risk of one unsecured creditor being paid before another/being paid a greater percentage of what it is owed than another (i.e. to ensure that all unsecured creditors are treated equally).
If a Winding up Petition has been presented against a company and it is intended that that company will enter into a transaction to dispose of any of its assets, the parties to that transaction should seek a Validation Order from the Court under Section 127. The Validation Order will order that the transaction will be valid, even if the company is subsequently wound up.
A “disposition” can include any security proposed to be granted by the company to a lender (such as a debenture) to secure the repayment of any funding that the company may be seeking to obtain. If a Validation Order is not obtained, such security would not be valid and could not be enforced if the company were then to be wound up on that petition.
Retrospective Validation Orders
It is possible to obtain a Validation Order retrospectively after the transaction has taken place, even if this is after the company has been placed into liquidation.
Until recently, it could be presumed that a disposition would "normally" be validated by the court retrospectively where that disposition had been made in good faith by the company; in the ordinary course of its business; and at a time when the parties were not aware that a winding up petition had been presented against the Company (as per the decision in Re Gray’s Inn Construction Company Ltd  1 WLR 711).
However, the decision in the recent case of Express Electrical Distributors Ltd v Beavis and others  EWCA Civ 765 has changed that proposition.
It can now no longer be presumed that a Validation Order will be granted retrospectively in such circumstances, even where neither party are aware of the existence of the petition and have acted in good faith.
Following the decision in Express Electrical Distributors Ltd v Beavis, a Validation Order will only be granted by the Court if there are “special circumstances”. Those special circumstances will need to demonstrate that there is a benefit to the general body of unsecured creditors that justifies the court overriding the principle that all creditors should be treated equally.
At Clarion we have a very good track record in successfully obtaining Validation Orders where they are needed.
Should you have any queries regarding Validation Orders or believe that you may need to apply to Court for such an Order, then please do not hesitate to contact us.
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