Validation orders are court orders that enable businesses to conduct transactions when they’re subject to a winding-up petition by a creditor. Winding-up petitions severely limit the business’s ability to trade normally as they’re advertised publicly in the Gazette and alert creditors and other interested parties to the company’s financial position.
This article will explain how validation orders work, how to apply for a validation order and what evidence you need as part of your application.
The article has been co-produced with Karl Hodson, an expert on validation orders at UK Business Finance. Karl is responsible for helping businesses across the UK raise funding for a variety of purposes such as working capital, expansion and capital equipment. He has specialist knowledge of raising finance through invoice and asset-based lending, crowdfunding, loan and equity funds and Government schemes.
Contents:
How do validation orders work?
A validation order works by allowing a transaction, which might otherwise be void, to go through the bank account of a company subject to a winding up petition. Common examples of court validated transactions include wages and supplier payments, but property and other assets may also be disposed of via a validation order if the court decides the transaction won’t be detrimental to creditors as a whole.
Some validation orders are date specific and allow a business to trade normally for a certain time whilst others sanction unrestricted trading while the future of the business is ascertained.
How to apply for a validation order
You can apply a for validation order using application form 1AA, but creditors with an interest in a transaction may also apply. The application form is sent to the court handling the winding-up petition and must be accompanied by a detailed witness statement and payment of £155.
Once the court receives your application a hearing date is arranged where you can put your case in more detail and answer any questions. It’s important to present a clear and compelling case to the court and demonstrate the company’s ability to pay its debts.
Evidence to include with your application
The court will need to see solid evidence that granting the validation order will benefit creditors - transactions detrimental to creditors won’t be permitted as their interests must be prioritised in this situation.
Details in a witness statement will typically include:
- Reasons why the winding-up petition has been filed
- Financial information, including levels of assets and liabilities
- Whether the debt is disputed or accepted
- The transaction(s) for validation by the court
- If a property transaction is required, full details of the property and a professional valuation from an independent source
- Cash flow and profit and loss projections for the proposed validation order period
- Reasons why the transactions need to be validated
What happens after the validation order hearing?
A validation order hearing generally takes place within a few days and there are three potential outcomes:
The validation order is granted
If the order is granted by the court you’ll need to send a copy of it to your bank. They should remove the ‘freeze’ on your account straight away so the transactions stated in the validation order can be made.
More evidence is needed to support your application
In some cases, the court will require more evidence to be presented before they can make a decision on whether to grant a validation order. In this case you’ll have to gather the information they need and attend another hearing.
Your application is refused
If the court believes that allowing a transaction to go through would be detrimental to your creditors your application is likely to be refused and you may be forced into liquidation, which means your company closes down permanently.
Summary
Validation orders allow companies under threat of winding up to carry on in business to some degree and to potentially reach agreement with their creditors via formal negotiations. It’s vital to act quickly in this situation as presenting a winding-up petition is a serious step for any creditor to take.
