If directors of an insolvent company do not act swiftly to remedy the situation, or maintain clear communication with creditors, then they are likely to be served with a winding-up petition. A winding-up petition often precedes a compulsory liquidation, meaning the future of a company on the receiving end is at risk. Furthermore, once this petition is published in the relevant Gazette, the company’s accounts will be frozen to ensure funds cannot be drawn away from the company. While this is done to protect the interests of creditors, it also completely halts a company’s ability to trade as normal.
In cases such as these, a validation order must be sought to lift the restrictions placed on a company, allowing it to resume trading. In this article, Clarke Bell will discuss validation orders in detail, how they work, and how you can get one for your company.
What is a validation order?
A validation order is a court order that allows companies served with a winding-up petition to continue with ongoing transactions. Essentially, a validation order lifts the freeze placed on company accounts by banks, allowing them to make and receive payments once more. Although company directors often submit an application for a validation order, it can also be done by other parties. Liquidators, or even creditors themselves, can apply for a validation order if the situation demands it.
Applying for a validation order
If your company is served with a winding-up petition, but has outstanding transactions left to complete, applying for a validation order should be a priority. As we mentioned, this will allow your company to continue trading, giving you the opportunity to finish off any transactions left incomplete.
To apply for a validation order, you will need to complete a Form IAA, then send it to the court handling your current case. In addition, you will need to provide a witness statement, and £155 to cover the application cost. Lastly, you must include information regarding the company’s current financial state, and the outstanding transactions you would like to complete. You may be required to provide the following information:
- Details surrounding any outstanding transaction. This includes the identity of the other party or parties involved, timeframes, and what is included in the transaction.
- If assets or property is part of a transaction, you must provide details regarding the value of the asset, a means of identification, and proof that the asset or property was valued professionally.
- Records of your company’s assets, accounts, and liabilities.
- Profit/loss projections and cash flow, specifically for the time period outlined in your application for a validation order.
- A detailed overview of your company’s financial situation, why a winding-up petition was served, and what led up to the decision.
Why apply for a validation order?
There are several reasons why you should apply for a validation order if your company has been served with a winding-up petition. The most notable benefit, of course, is to lift the restrictions placed on your company’s accounts. This will allow you to wrap up any remaining transactions, while also allowing you to continue trading as normal until your company’s future has been decided. Moreover, if your validation order is approved, your company will not have further restrictions placed upon it for the duration of the order.
By obtaining a validation order, you will essentially free your company from trade restrictions while you handle the winding-up petition. This will essentially shelter your company from financial damage, if you intend to contest the winding-up petition and keep your company in operation. Failing to swiftly obtain a validation order will result in your company being barred from continuing its normal operations, which can have far-reaching effects.
What to do if your company is insolvent
As we mentioned, an insolvent company is at risk of being served with a winding-up petition, which typically is the first step to compulsory liquidation. Applying for a validation order is one way to address your company’s financial situation, but it has two main drawbacks; it is only suitable for directors that aim to keep their company in operation, and can only be used after a winding-up petition is served. If you would prefer to take preemptive action to address your company’s debt, you have other options to consider.
Option 1: Company Voluntary Arrangement (CVA)
The first option of the two is a Company Voluntary Arrangement (CVA). This option, like a validation order, is suitable for directors that want to keep their company running well into the future. This procedure is essentially a negotiation with your creditors, with the aim of agreeing upon a new set of repayment terms. Ideally, these terms will be beneficial to both parties, allowing your company to continue trading, while ensuring creditors collect their repayments. Negotiations will be conducted by a licensed insolvency practitioner, who will do their utmost to arrive at an agreement suitable for both parties.
Option 2: Creditors’ Voluntary Liquidation (CVL)
The second option is a Creditors’ Voluntary Liquidation (CVL). This procedure is more suitable for directors looking to close their company voluntarily, thereby avoiding the negative consequences of having compulsory liquidation forced upon them. The procedure has several core benefits; to begin with, directors can appoint an insolvency practitioner of their choice. This insolvency practitioner will assume the role of the liquidator; they will take the helm of the company, identify all company assets, accounts, and liabilities, then begin the liquidation process. The company’s assets will be disposed of, with the proceeds being redistributed amongst creditors, then shareholders, if any funds remain. The company will then be wound up and removed from the Companies House register.
In addition to an efficient means of liquidation, the CVL procedure affords significant legal protections. First, your company will be protected from legal action once the procedure is underway. This shields your company from compulsory liquidation, and the associated downsides of the procedure. Next, any debts that remain at the end of the procedure will be written off unless a personal guarantee secures them. In such cases, the signatory will be required to cover the debt using their personal finances. For more information regarding Creditors’ Voluntary Liquidations, read our complete guide to the process.
Let Clarke Bell help
If your company is insolvent, don’t struggle through it alone, let Clarke Bell help. We have more than 28 years of experience in helping companies find the best solutions to their debt problems, and we can do the same for you. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.