Insolvency procedures: winding up part 12

We saw last week that if a petition is presented and winding order made subsequently that the commencement of the winding up order dates back to the presentation of the petition. We also saw that disposition of all kinds of property (defined in the widest terms) would be void after commencement of the winding up. Since these disposals would include payments out of the company's bank account they and all sorts of other transactions are at risk once a petition is presented. This is because if a winding up order is eventually made all those transactions will be void.

One of the problems is that of course when a petition is presented one does not know whether the petition will succeed or not. However you would be pretty rash if you were dealing with a company and aware of the presentation of a petition if you just decided to wait and see. Ordinarily you would refuse to deal with the company until the matter was sorted out. After the presentation of a petition normally the petition is advertised (an issue dealt with hereafter) and most banks will keep an eye upon the advertisements in the Gazette so as to ascertain when any of their customers are subject to a petition. In broad terms once you are subject to a petition unless the court gives an order validating transactions under section 127 you are in deep trouble. The unwillingness of parties to deal with you could cause the company to become insolvent even if in fact it was not otherwise so.

There are two particular steps which are available to accompany in these circumstances. One is to seek to validate transactions by way of court order. The second is to seek to restrain presentation and/or advertisement of the petition. Either or both steps may be taken. Obviously in circumstances where the petition seems to have no merit there may well be an application to strike it out forthwith. (For example, a party may have provided defective services to the company, the company might have complained, and alleged loss and damage. Consequently a bill might then have been presented which the company disputed, and despite the dispute the alleged creditor might have written a letter saying that the company had better pay up or else the provider of services would issue a winding up petition and whatever the dispute is that makes no difference because once a petition is presented the business of the company would be wrecked anyway. Not only in such circumstances should the petition be struck out but there could be a cause of action for damages against the creditor if and insofar as a petition had been falsely and maliciously presented. Whilst in an appropriate case to court will allow demand to debts to lead to a winding up, they are also aware of the potential abuse of the process to try and threaten a company into paying a debt which it disputed, and the courts are always ready to deal with such potential abuse.).

Whilst transactions can be validated by the court either prospectively or retrospectively, it is obviously better to take the former course and have a transaction validated before it occurs. That way there is certainty as to what the effect would be.

A practice direction about validation orders was issued by the Chancellor of the High Court on the 11th of January 2007. The Chancellor is the Head Judge in the Chancery Division which is where insolvency matters are dealt with.

Next week we will look at precisely what hurdles you have to go through in order to get a validation order.