Winding Up Petitions and Validation Orders - High Court Guidance

From the moment a winding up petition is presented against a company, any payments that it makes become legally void if a winding up order is granted. However, what happens if supplies are made to that company before the supplier is aware of the winding up petition? The High Court tackled that thorny issue in a decision which will be required reading for insolvency practitioners.

The case involved a company that supplied electrical goods to another company after a winding up petition had been presented against the latter. The purchasing company had paid £30,000 in respect of those goods before the petition was advertised. It was later wound up and its liquidators demanded that the first company repay the £30,000.

Fearing that it would otherwise have to wait in line with other creditors, the company refused and sought a 'validation order' regarding the payment under Section 127 of the Insolvency Act 1986, which would have entitled it to keep the money. However, its application was rejected by a judge and the company appealed.

In dismissing its appeal, the Court found that, save in exceptional cases, a validation order should only be made in relation to payments made after presentation of a winding up petition if it can be shown that such payments have been made for the benefit of unsecured creditors in general.

Part of the £30,000 had been paid before it was contractually due and the Court found that the whole sum had not been received by the first company in the ordinary course of business. In the circumstances, there were grounds for thinking that the transaction might have involved an attempt to prefer that company over other creditors.