Winding-up, Void Dispositions and Validation Orders

A Winding-Up Petition has been presented against my company, can I just pay the Petitioner to stop proceedings?

Sometimes a company may miss a payment demand due to a simple oversight, absent staff, or miscommunication. In the worst-case scenario, missed payments may result in a Winding-Up Petition being used against the company. Upon being served with a Winding-Up Petition, the directors of a company may understandably panic and seek to instantly make payment of the Petition debt in an effort to stop the winding-up proceedings continuing. However, it is a common misconception of directors that simply making payment of the Petition debt will entirely resolve matters in every case. Whilst that may be the case if there is no supporting creditor or the Petition has not been advertised and can be disposed of at the first hearing or withdrawn, matters can be more complicated depending upon the stage the Petition has reached. If your company receives a Winding-Up Petition immediate specialist legal advice should be sought to avoid any potential pitfalls and maximise the options available to the company before matters escalate further.

Pursuant to section 127 of The Insolvency Act 1986 (“IA86”), “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,” but what does this really mean?

If a Winding-Up Order is made, the commencement of the winding-up will be the date of the presentation of the Winding-Up Petition and any transactions made after this date, including payment of the Petition debt or indeed payments to other creditors, are automatically void, unless the Court orders otherwise. Transactions which would amount to a void disposition include (but are not limited to):

• Payments out of a company’s bank account
• Payment into a company’s overdrawn band account; and
• Sale of company assets.

The objective of Section 127 IA86 is to preserve the assets of the company for the benefit of the creditors of the company as a whole and thereby to uphold the principle of pari-passau asset distribution to ensure that, in a winding-up, creditors of the same class are not treated differently.

Consequences of a Void Disposition

If a company is the subject of a Winding-Up Order, a liquidator may seek to recover any property (including payment of the Petition debt) that was subject of a void disposition. This can also potentially result in a liability for the directors of the company on the grounds that they have misapplied company assets.

How do you settle a Petition debt after the presentation of a Winding-Up Petition?

If a Winding-Up Order is made, a transaction will not be void if the Court validates the transaction. Seeking validation would be sought by an application to the Court for a Validation Order and such application will be a necessity if, after advertisement of the Petition, the Company’s bank account is frozen and essential payments (which will benefit creditors) are required to be made. The application can be made by the company subject to Winding-Up Petition or any interested party to a transaction with the company. An application can be made at any time, but it is best practice to obtain a Validation Order prior to making the payment or disposing of the company’s property. The risk of making the application after the transaction has been concluded, is that the Court may refuse to retrospectively validate the transaction.

If your company is in financial difficulties and/or is subject to a Winding-Up Petition, it is important to take advice early as to maximise the options which may be available to you before matters escalate. At Barker Gotelee LLP, the Insolvency and Business Recovery Team have specialist knowledge and expertise with over 50 years of combines experience in advising clients on a wide range of insolvency matters. For a confidential initial discussion, please contact a member of our Insolvency & Business Recovery Team.