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femi@loftusstowe.com|Companies in England and Wales
Under section 127, a company payment made after a winding up petition is presented is void if the company is wound up. The court can order otherwise. Banks usually freeze the account once the petition is advertised, and a validation order is the court's permission to keep paying. I am Femi Ogunshakin, an insolvency solicitor. Your first 30-minute consultation is free.
Section 127(1) makes "any disposition of the company's property" made after the winding up starts void, "unless the court otherwise orders". It also catches transfers of shares and changes in the status of the company's members. In a court winding up, the start date is normally the day the petition was presented.
Dispositions include payments out of the company bank account, whether the account is in credit or overdrawn. If a winding up order is made, those payments are void unless the court has validated them.
The rule only applies in a winding up by the court. If the company had already resolved to wind up voluntarily before the petition, the start date is the date of that resolution.
Subsection (2) says section 127 does not affect anything an administrator does while a winding up petition is suspended under paragraph 40 of Schedule B1.
Subsection (3) says it does not affect anything done during a company moratorium under Part A1. That applies where the petition was presented before the moratorium began. A narrow exception applies to certain petitions under the Financial Services and Markets Act 2000.
Both matter. The risk runs from the day the petition is presented, but payments only become void if a winding up order is made.
The risk becomes real if the company is wound up. Every payment since the petition was presented is then void, unless the court has validated it.
The Court of Appeal has said that recovering a void payment is a restitution claim under the general law.
In Express Electrical, the company paid a supplier £30,000 after the petition was presented. The court refused to validate it, and the supplier had to repay the liquidators. A payment made in good faith in the ordinary course of business does not qualify on that ground alone.
In a winding up, the court can examine a director's conduct and order repayment of company money that was misapplied. More on this below.
Banks usually freeze the account once the petition is advertised. A validation order is the court's order that named payments will not be void if the company is wound up.
The court needs credible evidence of one of two things. Either the company is solvent and can pay its debts as they fall due. Or the payments will benefit, or not prejudice, the unsecured creditors as a class.
The leading statement comes from Re Gray's Inn Construction, as quoted by the Court of Appeal in Express Electrical. The court "must always … do its best to ensure that the interests of the unsecured creditors will not be prejudiced".
In practice, routine trading payments such as wages, rent and suppliers are regularly allowed. Payments that move value to directors or connected companies are rarely allowed, and only where there is an exceptional case for them.
The court should not validate a payment that clears an old debt in full while others get a dividend, "in the absence of special circumstances".
It can validate paying an old debt in full where that is a necessary part of a deal benefiting the unsecured creditors as a whole.
More on the order itself: what is a validation order.
Yes. The court can be asked to validate a payment after it has been made, even after a winding up order. The Court of Appeal has held that the same principles apply as to an application made in advance. Applying first is still the safer course, because nobody knows the answer until the court decides.
The account still works, but the section 127 risk has already started. The notice cannot appear until 7 clear business days after service, not counting the day of service. An application made now can be in place before the bank acts.
If you have been served today, get in touch today. The window is measured in business days.
If wages are due and the full evidence cannot be gathered in time, the court may grant limited relief for a short period. There must still be enough evidence that creditors are unlikely to be prejudiced. Read more on what to do when the company bank account is frozen.
If payroll is days away, say so when you call. I will tell you straight away whether the timing works.
Section 127 deals with the payment. Other sections of the Act can apply to directors personally if the company is wound up.
The court can order a director who misapplied company money, or breached a duty, to repay it with interest or pay compensation.
A liquidator can also ask the court to make a director contribute for wrongful trading. That applies where, before the winding up began, the director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation. A director has a defence if they then took every step they should have taken to minimise the potential loss to creditors.
A payment that puts one creditor in a better position than in an insolvent liquidation can be challenged as a preference. If that creditor is connected with the company, the law presumes the company meant to prefer them unless shown otherwise. For connected people, payments in the 2 years before the petition was presented can be examined.
Talk to me before the company pays a director, a connected company or an old creditor after a petition. I can tell you where you stand in the free consultation.
It is a disposition of company property made after the petition, where the company is then wound up. Section 127 treats it as void. Payments out of the company bank account are dispositions.
Yes. Payments out of the company account are dispositions, whether the account is in credit or overdrawn. Section 127 does not itself say how a void payment is recovered. The Court of Appeal has said recovery is a restitution claim under the general law.
It applies only in a winding up by the court. It does not affect what an administrator does while a winding up petition is suspended under paragraph 40 of Schedule B1.
From the date the petition is presented, but only if a winding up order is later made.
Yes. The court can validate a payment after it has been made, applying the same principles as to an advance application.
Yes, if the payment was made after the petition and was not validated. In Express Electrical, a supplier had to repay £30,000 to the liquidators.
A free 30-minute consultation with me to explore your options and protect your business.
The fixed fee for a validation order application is £10,000 to £15,000 plus VAT, depending on the size of the petition debt. See the full fee breakdown.
Who you will deal with
Femi O. Ogunshakin
Solicitor, Tax Adviser and Former HMRC Inspector
Validation order applications are a large part of my practice. Most of the petitions I deal with are brought by HMRC, and my time as an HMRC inspector means I know how the petitioning side builds and runs these cases.
You will deal with me directly rather than with an introducer or a case handler. The work is carried out through Nexa Law, where I practise. The first 30 minutes are free.
If your company has received a winding up petition, it is important to act quickly. Call or email me to discuss how to apply for a validation order from the insolvency courts. I offer a free 30-minute consultation to help you explore your options and protect your business.
07867 795 439
Email femi@loftusstowe.com
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