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What is a Validation Order in business?

When a company is subject to a winding up petition, an advertisement is placed in the Gazette to alert other creditors. Once the petition becomes public knowledge, the banks typically freeze the business’ accounts to protect themselves from liability.

This has serious ramifications, as without access to its bank accounts the business is unable to trade normally. The situation can be dealt with to some extent, however, by obtaining a validation order through the courts.

What is a validation order?

A validation order is an order of the court that authorises and ‘validates’ transactions going through a business’ bank account, regardless of the fact that a winding up petition is ongoing.

The order essentially ‘unfreezes’ the account and allows certain, or in some cases, all transactions to go through. A company with a winding up petition made against it can apply for a validation order, but there may be circumstances in which other parties can also apply - if another entity has an interest in one of the transactions, for example.

What are the benefits of validation orders?

Validation orders hold a number of potential benefits to the business itself, its creditors, and other parties with a vested interest. Depending on individual cases, they may allow:

  • Specific transactions to go through the business’ bank accounts - these could include staff wages, for example, or supplier payments
  • The company to trade with no restrictions for a specific period of time, perhaps until the next court hearing
  • All restrictions to be lifted until the future of the business has been determined

Applying for a validation order

Form IAA is used to apply for a validation order. It should be sent to the court dealing with the winding up petition along with a witness statement and the fee, which is currently £155. When applying for a validation order the company’s directors need to provide detailed evidence that supports their case.

Evidence can include, but is not limited to:

  • Documentation regarding the company’s assets, security, and liabilities – this could be presented within a statement of affairs, or perhaps a set of audited accounts
  • An explanation as to why the company is in this perilous financial position and the circumstances surrounding the winding up petition
  • Cash flow forecasts and profit and loss projections incorporating the proposed period of the validation order
  • Information regarding the transactions to be validated
  • If a property transaction is  pending, the property’s title number and evidence that it has been fairly valued

Shortly after form IAA has been filed at court, a hearing is arranged and the applicant presents their case for a validation order. At the end of the hearing the court may grant the order, but in some cases may need to see additional evidence.

Begbies Traynor is the UK’s largest professional services consultancy, and can help you if your company is subject to a winding up petition. Please contact one of our licensed insolvency practitioners to arrange a free same-day consultation. We operate an extensive network of offices throughout the UK, so you’re never far from professional support.

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