Another High Court Success for Litigation Team
30th May 2017
Our Litigation team led by Peter Hastings has notched up another High Court success. Peter was instructed by a company to oppose a winding up petition presented in the sum of £130,000. Before Peter was instructed, the Company had already been before the Court three times, so he immediately filed detailed evidence to oppose the winding-up petition and also to seek a Validation Order under Section 127 of the 127 of the Insolvency Act 1986 (“IA 1986”).
Peter comments “The Company wanted to continue trading. To do so we needed to apply urgently for a Validation Order under Section 127(1) of the IA 1986 which states:
‘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’
A validation order is an order from the Court which sanctions a disposition of property by a company made after the presentation of a winding-up petition which would ordinarily be considered void. The principles underpinning the rule are to preserve the assets of the company for the benefit of its creditors and to guard against the risk of one unsecured creditor being paid before another.”
Peter adds “The effects of section 127 of the IA 1986 for the company are two-fold:
- The company’s bank will freeze the company’s accounts to protect the bank in the event that a winding up order is made. Once its accounts have been frozen, the company may find itself unable to pay its employees and suppliers, and so may be forced to cease trading.
- The company (and its directors) will face real difficulties in determining whether or not the company should enter into transactions or dispose of its assets before the hearing of the petition by the court” seek a validation order under section 127 of the IA 1986.
If the directors cause the company to dispose of its assets without obtaining prior approval from the court, and the company is subsequently placed in insolvent liquidation, the directors are potentially liable to the company for the misapplication of its assets. The liquidator can also seek to recover any property subject to a void disposition. Consequently if a disposition is to be made, a validation order should be sought, preferably before the disposition is made but it can be sought retrospectively.
A third party in line to receive property from the company may also want to seek a validation order to prevent the receipt of property from the company subsequently being avoided.
A validation order may either:
- Validate a disposition as part of a specific transaction (for example, a sale of the company’s business or a particular asset).
- Permit a particular type of disposition (for example, all dispositions by the company in the ordinary course of its business).
The Judge will need extensive evidence as to why the Court should grant the order. The evidence and information the Court will require includes;
1. Why the petition was issued and what the circumstances were.
2. Whether the petition debt is admitted or disputed and, if the latter, brief details of the basis on which the debt is disputed;
3. 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;
4. A cash flow forecast and profit and loss projection for the period for which the order is sought;
5. Details of the dispositions or payments in respect of which an order is sought;
6. The reasons relied on in support of the need for such dispositions or payments to be made;
7. Any other information relevant to the exercise of the court’s discretions;
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.
Having secured the Validation Order, HMRC also accepted that the debt claimed was overstated and it was very significantly reduced. Our client paid the small sum that was due and the petition was dismissed.
If you need urgent help to oppose a petition by HMRC or any creditor, we can help you to either negotiate payment arrangement and time to pay, obtain a validation order and if appropriate, opposed the petition. We are also experienced in obtaining injunctions to refrain the advertisement of petitions.
Peter’s final warning is “if you dispute any assessment by HMRC, you must appeal to the First Tier Tax Tribunal – you can contact me for help and advice on the matter on 01603 675639 or at firstname.lastname@example.org