To trade or not to trade...

When a company is presented with a winding up petition it is not uncommon for the business to continue trading whilst the directors try to resolve the issue with the creditors concerned.  However, directors need to be aware of the implications of the petition if the company is later wound up by the court and placed into compulsory liquidation.

Section 127 of the Insolvency Act 1986 is a small but hard hitting law that allows a liquidator to claw back assets that may have been disposed of by the company during the period immediately following presentation of the winding up petition to the date the company is actually wound up by the court.  

Upon a winding up petition being presented, an advert is placed in the London Gazette which gives notice to the company’s bank of the existence of a petition. The account will usually be frozen to protect the bank in the event that a winding up order is made. Once the account has been frozen, a company will inevitably face difficulties paying its employees and suppliers, thus threatening its ability to continue trading.

The company and its directors will face a real challenge when deciding whether or not the company should try to continue to trade, or dispose of any or all of its assets prior to the hearing of the petition by the court, thus providing it with cash to keep it going.  

Disposal of assets includes, amongst other things, payments to suppliers and the sale of company shares or assets such as vehicles, plant and machinery. If the company is wound up by the court and placed in compulsory liquidation, the appointed liquidator can demand that such assets be restored to the company by the recipient unless the court has given permission for the transaction to take place.  

To avoid the consequences of Section 127, the company will need to apply to the court for a validation order. This effectively provides the company with the permission to make transactions, even though a live winding up petition is in place.

A validation order may either validate a disposition as part of a specific transaction, such as a sale of the company’s business or a particular asset, or give permission for a particular type of disposition, such as payments made by the company in the ordinary course of business. It is preferable for a validation order to be sought prior to the transaction taking place but it can be sought retrospectively. A recipient of property from the company may also want the comfort of a validation order so that they know the subsequent liquidator will not take action against them!

The Insolvency Act contains similar provisions for an individual bankrupt at Section 284.

If your company is facing a winding up petition then the earlier you take legal advice the better. At Birkett Long we have extensive experience in drafting validation order applications that enable our clients to make essential payments, and allow them to continue to trade prior up until the determination of the petition by the court. Such orders can mean the difference between life and death for a company.