Insolvency procedures: winding up part 13

The courts are always keen for understandable reasons to ensure that the interests of creditors generally are protected where there is a potential winding up. Paragraph 9 of the practice note on validation orders provides that the court needs to be satisfied by "credible evidence" that either the company is solvent and able to pay its debts as they fall due or that a particular transaction or series of transactions in respect of which the order is sought will either be beneficial to or will not prejudice the interests of unsecured creditors generally.

Of course paradoxically this involves the court potentially taking a view diametrically opposed to the entire basis of presentation of a winding up petition in the first place. If the company is solvent and able to pay its debts as they fall due then no winding up order on the petition should be made in any event. Of course the whole point is that once a petition is presented, other people dealing with the company would not take that risk. Instead they will work on the assumption that a winding up order could be made and so absent a validation order would be unwilling to trade with the company. If it is clear that the company is truly solvent then the validation ought to be capable of being obtained otherwise insolvency on presentation of a petition would become a self-fulfilling prophecy. Needless to say if the application is being made on the basis of solvency then there would have to be full and up-to-date evidence of that. Since the court would need to be satisfied that it was in a position to reach an informed view as to the company's solvency, so it would obviously be important for the supporting documentation to be sufficient that the court could be confident that that was the position it was in.

In the same way if an item of property was being disposed of the court would want to know that the disposal was for full value and normally one would expect that an independent valuation should be obtained and exhibited to the evidence (practice note paragraph 8).

There is also often a need to permit payment which will allow trading if it seems that trading is to the benefit of creditors or will not prejudice them. Thus a company trading at a loss will be unlikely to have transactions validated unless there was a compelling reason, such as the fact that cessation would cause liabilities to accrue and loss of any chance of disposing of the business for the benefit of creditors. Often unless employees are paid, electricity or gas water etc paid for and payments for essential supplies made (if the business makes things out of pieces of wood, if it cannot pay for the pieces of wood then it cannot trade) then the business will simply collapse.

There are a large number of items of information which is supposed to be put before the court before any validation order is made. However paragraph 7 of the practice note recognizes that there may need to be an urgent application for the payment of essential items such as wages and in those circumstances it may be simply impossible to amass all the relevant evidence. In those circumstances what is suggested is that the court might grant relief for a short period but even then there should be sufficient evidence to satisfy the court that the interests of creditors