Overview Of Applying For A Validation Order
Applying for a validation order can be relevant because when a person goes Bankrupt or a company goes into Liquidation, there is typically a period of time between the hearing of the Bankruptcy or Winding Up Petition and the making of the Bankruptcy Order, during which any disposal of assets or property will be void except if the Court orders otherwise.
Restrictions On Dispositions Of Property
The position for individuals is set out in Section 284 of the Insolvency Act 1986:
(1) Where a person is made bankrupt, any disposition of property made by that person in the period to which this section applies is void except to the extent that it is or was made with the consent of the court, or is or was subsequently ratified by the court.
(2) Subsection (1) applies to a payment (whether in cash or otherwise) as it applies to a disposition of property and, accordingly, where any payment is void by virtue of that subsection, the person paid shall hold the sum paid for the bankrupt as part of his estate.
(3)This section applies to the period beginning with the day of the making of the bankruptcy application or (as the case may be) the presentation of the bankruptcy petition] and ending with the vesting, under Chapter IV of this Part, of the bankrupt’s estate in a trustee.
(4) The preceding provisions of this section do not give a remedy against any person—
(a) in respect of any property or payment which he received before the commencement of the bankruptcy in good faith, for value and without notice that the bankruptcy application had been made or (as the case may be) that the bankruptcy petition had been presented, or
(b) in respect of any interest in property which derives from an interest in respect of which there is, by virtue of this subsection, no remedy.
(5) Where after the commencement of his bankruptcy the bankrupt has incurred a debt to a banker or other person by reason of the making of a payment which is void under this section, that debt is deemed for the purposes of any of this Group of Parts to have been incurred before the commencement of the bankruptcy unless—
(a) that banker or person had notice of the bankruptcy before the debt was incurred, or
(b) it is not reasonably practicable for the amount of the payment to be recovered from the person to whom it was made.
(6) A disposition of property is void under this section notwithstanding that the property is not or, as the case may be, would not be comprised in the bankrupt’s estate; but nothing in this section affects any disposition made by a person of property held by him on trust for any other person.
The intention of the section is to ensure that assets ought to be available for the bankrupt’s creditors on an equal basis.
In a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is, unless the court otherwise orders, void.
Justification For A Validation Order
The Court will need to be satisfied by credible evidence either that the company or individual is solvent and able to pay its debts as they fall due or that a particular transaction or series of transactions in respect of which the order is sought will be beneficial to or will not prejudice the interests of all the unsecured creditors as a class.
Information For A Validation Order Application
The following information is typically going to be required when applying for a validation order:
- Why the petition was issued and details of all the relevant circumstances.
- Whether the petition debt is admitted or disputed and, if the latter, brief details of that disputed grounds;
- 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;
Legal Expenses When Contesting Bankruptcy
In the matter of Re a Debtor (490 of 1935)  1 Ch. 92 an individual sought to contest or appeal the making of a bankruptcy order. The case considered whether or not the legal expenses paid to a solicitor could be discharged from the bankruptcy estate’s assets.
The problem is that upon the making of a bankruptcy order the assets of the bankrupt vest in the Trustee In Bankruptcy pursuant to Section 306 of the Insolvency Act 1986. That issue, therefore, was developed by Clauson J as follows if an appeal against the bankruptcy order was unsuccessful:
It is certainly remarkable that if this application does not succeed and if the respondents are held entitled to retain the sums which were paid to them after the receiving order, the effect will be that the Court will sanction security for the costs of an appeal being lodged by the debt out of the fund which would necessarily, in view of the receiving order having been made, unless the receiving order is upset, be moneys of the applicant.
What the Court said was whilst there was a practice that a Trustee in Bankruptcy may permit the solicitors to whom a debtor has paid a sum of money for their fees to defend bankruptcy proceedings, this would not extend to the costs of supporting an appeal that was unsuccessful.
The question of post-petition asset disposals was considered in more recent times in the matter of Rio Properties Inc. v Al-Midani  BPIR 128 in which the following notably said:
The payment of the legal costs could only reduce the estate available to creditors. Only by the most tortuous reasoning could one say that the payment of the legal costs were of any benefit to creditors … The conclusion I have reached is that under the 1986 regime, the court’s discretion under section 284 could be exercised to allow payment of the debtor’s legal costs in opposing the petition and that is the way by which effect could be given to the principle in Re: Sinclair . However, it would remain as a discretion. The court would expect to have some evidence as to the financial position of the debtor and of the grounds for possession.
This case highlighted the point from the well-known authority in respect of Section 127 ie. Re Gray’s Inn Construction 1980 1 W.L.R. 711:
The court’s discretion under section 227 should be exercised in the context of the liquidation provisions of the 1948 Act and the court should not in exercising that discretion, validate any transaction which would result in a pre-liquidation creditor being paid in full at the expense of other creditors who would only receive their dividends unless to do so would benefit the unsecured creditors as a whole.
This position was further highlighted in Re Fairway Graphics 1991 BCLC 468, where Harman J. said this:
It is, in my judgment, a clear and well-settled point of practice in the Companies’ Court that validation orders as they are called, are only made in respect of companies where the court is satisfied by credible evidence as to one or other of two factual conclusions: Either the court must be satisfied … that the company is solvent and able to pay its debts as they fall due. Alternatively, the court must be satisfied that a particular transaction, usually a sale of a substantial asset, is beneficial to creditors or it produces an advantageous price or some such benefit or that a series of transactions, usually the carrying-on of the company’s trade, are likely to be profitable and therefore will increase the company’s assets so as to be beneficial to creditors. The court looks to see that the validation order is likely to benefit the creditors as a class.