My bank account has been frozen and I have been told I need a validation order to unfreeze it...
A validation order is a court order a company can apply for to 'unfreeze' the company's bank account. This order essentially "validates" transactions going through the account and prevents a liquidator from holding the bank liable for money being withdrawn whilst there is a winding up petition.
A bank will USUALLY freeze the account of a company that has had a winding up petition served on it. This is because Section 127 of the Insolvency Act effectively makes any disposition of the company's assets after commencement of winding up void unless the court otherwise orders.
Due to the recent Corporate Insolvency and Governance Act 2020 the rules around advertising have been amended. Any requirements to publish or advertise the petition do not apply until the court has determined that it is likely to be able to make a winding-up order.
So in effect, if the company is wound up, the liquidator can in theory force the bank to make up any loss from the bank account. So the banks tend to act to protect their position by freezing the account. Of course, this then means that there is no access to money to keep the company trading which will inevitably force it to close. So what can be done?
How do I apply for a validation order
The key phrase in the Insolvency Act is unless the court otherwise orders. The company can apply for a Validation Order by the Court under section 127.
The company can apply to the Court to have an order made that says that disposition of company assets (including withdrawals from a bank account) will not be void in the event of a winding up order being granted.
An application can be heard by the court but the Judge will need extensive evidence as to why the Court should grant the order.
What evidence does the court require to grant a validation order?
The evidence and information the Court will require is generally but not limited to the following;
- Why the petition was issued and what the circumstances were.
- Whether the petition debt is admitted or disputed and, if the latter, brief details of the basis on which the debt is disputed;
- Full details of the company's financial position including details of its assets (including details of any security and the amount(s) secured) and liabilities, which should be supported, as far as possible, by documentary evidence e.g. the latest filed accounts, any draft audited accounts, management accounts or estimated statement of affairs;
- A cash flow forecast and profit and loss projection for the period for which the order is sought;
- Details of the dispositions or payments in respect of which an order is sought;
- The reasons relied on in support of the need for such dispositions or payments to be made;
- Any other information relevant to the exercise of the court's discretions;
A good draft CVA will cover points 3 & 4 and can make a compelling case for a validation order. However, a CVA will need to be in the final stages of being put together for it to constitute good evidence.
The Court may need to be satisfied by credible evidence that the company is solvent and able to pay its debts as they fall due or that the order sought will be beneficial to or will not prejudice the interests of all the unsecured creditors. In many cases the company will not be solvent but the court will take into account the second point that the order will be beneficial to the unsecured creditors AND that a CVA for example is being proposed.
What are the costs?
All in all, obtaining a validation order is an expensive process requiring detailed preparation of a witness statement and then of course counsel (a barrister) needs to be briefed and he or she need to address the Court. The need for a validation order and the extensive costs attached to the process, can be avoided if the company acts before the advertisement of the petition. A petitioner can sometimes be persuaded to not advertise the petition to give the company time to reorder its affairs.
We know many solicitors and barristers that can help with such orders. Call us on 08009700539 for help today
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Please note that the guide includes updates due to Covid-19 For instance there have been some changes to insolvency legislation that limits creditors actions. A new 20 day moratorium for distressed businesses has also been introduced.