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31st July 2016

Winding up: Court sets out the test for validating payments

The presentation of a winding-up petition to the Court.

A creditor and the debtor company can be in a tricky position following the presentation of a winding-up petition to the Court.  Unless sanctioned by the insolvency Court, any payment or transfer of property by the debtor company – and that includes a payment to a creditor – between the date the proceedings are issued and the hearing date, six weeks down the line,  will be void if a winding up Order is made at the hearing. This means that the liquidator can recover payments made or assets transferred in that period, where they don’t have the Court’s approval.  The test for getting the Court’s permission – a validation Order - for a payment or transfer can therefore be very important to the continuity of the business during the hiatus. It might be critical for the business’s prospects for survival at a time when its solvency is being challenged.

The Court of Appeal has recently considered the validation Order test in the case of EXPRESS ELECTRICAL DISTRIBUTORS LTD v BEAVIS & ORS (2016). In its decision, the Court emphasised that the Judge’s role is not to approve transactions that are made in good faith in the ordinary course of business.  That misses the point of the Court’s jurisdiction to see fairness between creditors (the pari passu principle). The Court made clear that save in exceptional cases, permission for a payment or transfer should only be given if the Court thinks it has or will benefit the general body of creditors. A payment could do this of course if it preserves value in the business. However, this could be difficult to argue where trading losses are increasing.  Those doing business with a company that is subject to winding up proceedings need to bear this in mind.

For more information please contact Dominic Hopkins on 01604 463339 or click here to email Dominic.

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