Another Day, Another Validation Order…………
Another successful validation order obtained for our client.
Many thanks to Kartikeya Sharma of 23ES for a brilliant job articulating what was a challenging case!
What is a Validation Order (And What Does It Have To Do With a Winding Up Petition)?
The word ‘Validation’ means different things depending on its usage. The dictionary lists: ‘acceptance’, ‘affirmation’, ‘authorisation’, ‘corroboration’, endorsement, proof, ‘recognition’, ‘verification’.
In the context of insolvency (both bankruptcy and company), a validation order is a special court order that allows a company to continue using its bank account or carry out specific transactions after a winding up petition has been issued against it.
A winding up petition is a legal step taken by creditors who believe that a company is unable to pay its debts. If granted by the court, the petition can lead to the company’s closure (also known as liquidation), and its assets sold to repay creditors.
Once a winding up petition is filed, the company’s bank accounts are usually frozen to protect the creditors’ interests. However, this can severely disrupt the company’s ability to operate, even if it plans to challenge the petition. This is where a validation order becomes essential.
A validation order allows the company to continue certain financial activities—like paying employees or making crucial payments—while the petition is being dealt with.
Consequences of Advertising a Winding Up Petition in the London Gazette
When a winding up petition is advertised in the London Gazette, it becomes public knowledge. This can have serious consequences for the company:
- Frozen Bank Accounts: Once the petition is advertised, banks often freeze the company’s accounts to prevent money from being moved around.
- Damaged Reputation: The advertisement can harm the company’s reputation, scaring away customers, suppliers, and investors.
- Increased Pressure from Creditors: Other creditors may join in to demand payment, increasing the financial strain on the company.
To prevent these issues, a company can apply for a validation order, which could unfreeze accounts and keep essential parts of the business running.
Need Help with a Winding Up Petition?
If your company has received a winding up petition, it’s important to act quickly. Contact Femi Ogunshakin to discuss how to apply for a validation order from the insolvency courts. Femi offers a free 30-minute consultation to help you explore your options and protect your business. Reach out on 07867 795 439 or email femi@femiogunshakin.com or femi.ogunshakin@nexa.law
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What is a Winding Up Petition?
A winding up petition is legal action taken by a creditor ie HM Revenue and Customs (HMRC) to force a company into closure because it cannot pay its debts.
Essentially, a winding up petition is a request to the court to wind up (or close) the company so its assets can be sold off to repay the money owed. If granted, the company may be placed in compulsory liquidation, meaning it will cease trading, and the creditors will receive payment from the sale of its assets.
How to Avoid a Winding Up Petition
Receiving a winding up petition can be very serious for any business, but there are steps you can take to avoid it:
- Pay your bills on time – Ensure that you manage your cash flow well and make regular payments to creditors. This shows that your company is financially healthy.
- Communicate with creditors – If you’re struggling to make payments, talk to your creditors. Many creditors are open to discussing repayment plans or negotiating terms rather than going to court. If you’re lucky, you might even get a time to pay arrangement agreed!
- Seek professional advice early – If your business is in financial difficulty, it’s important to get expert advice as soon as possible. They can help you restructure debts or explore other options to avoid legal action.
- Keep accurate financial records – Monitoring your company’s financial health is crucial. Regularly review your accounts and keep up-to-date records to spot any potential cash flow issues before they become serious.
Free Consultation
If your company is facing financial difficulties or you’re concerned about the possibility of a winding up petition, it’s important to seek advice quickly. Contact me for a free 30-minute consultation to discuss your situation and explore possible solutions. You can reach me on 07867 795 439 or email either femi@femiogunshakin.com or femi.ogunshakin@nexa.law
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Company insolvencies on an upward trend
Although showing a slight improvement from March, the number of company insolvencies in April of this year was more than double the number from April 2021. This shows just how important it is to get advice sooner rather than later if your company is experiencing problems.
The majority of insolvencies were creditors’ voluntary liquidations (CVLs):
| Total insolvencies | CVLs | |
| April 2019 | 1,429 | 1,024 |
| April 2020 | 1,199 | 933 |
| April 2021 | 925 | 815 |
| April 2022 | 1,991 | 1,777 |
Figures already available for May show no improvement. The government’s support measures kept insolvencies at bay during the Covid-19 pandemic, but the expected post-pandemic boom has not materialised for many businesses, followed instead by other damaging economic factors such as high inflation, the Ukraine war and supply chain challenges due to continuing Chinese lockdowns.
The insolvency figures suggest many directors lack confidence in their company’s ability to continue trading in the current climate possibly pre-empting later forced closure by bringing forward a difficult decision. Directors who have any doubts about their business are advised to seek advice as soon as possible. There are two tests which can act as a warning sign of insolvency:
- Cash flow test: Signs that a company is failing this test include late payment of suppliers and falling behind with payments to HMRC.
- Balance sheet test: Where a company’s liabilities exceed the value of its assets.
For small businesses and the self-employed, free advice can be obtained from the Business Debtline charity.
Avoiding insolvency
Two recently introduced measures might help a company avoid formal insolvency procedures.
- A moratorium period gives a struggling business a formal breathing space from creditors to explore rescue and restructuring options.
- A new type of restructuring plan can be implemented even if certain classes of creditors vote against it.
Guidance on tell-tale signs of potential insolvency, and how managing an insolvent company incorrectly can lead to personal liability and/or being disqualified as a director, can be found here.
Please get in touch with us sooner rather than later if you believe you may need help.
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Surviving Winter In the Midst of A Pandemic
A recent survey of small businesses has revealed that only a quarter of them are confident of their survival into 2021, with many worried about cash flow. Those businesses that took out Bounce Back Loans (BBLs) have already used up most of this funding.
Cash flow
Some two-thirds of businesses are waiting longer to be paid, with a significant number having had their customer payment terms renegotiated to three months or more. As they wait longer for cash to come in, these businesses in turn are withholding payments to suppliers.
If cash flow is an issue, businesses need to view sales and contracts in a completely different light. Payment terms are likely to be more important than short-term profitability.
The latest high-profile corporate collapse will see creditors of the Arcadia Group badly hit. With such giants of the high street unable to survive, it is essential to check a customer’s financial health before going ahead with a large sale or contract.
Coronavirus Business Interruption Loan Scheme (CBILS)
The CBILS is going to be the key to winter survival for many cash-strapped businesses. Now, here’s the really interesting bit; whilst it is not possible to benefit from both the CBIL and a BBL, a BBL can normally be refinanced into a CBILS. The CBILS borrowing limit is £5 million, so considerably more than the BBL maximum of £50,000, and with four times the number of lenders in the CBILS, there is much more choice.
There are, however, some downsides:
- The government only guarantees 80% of the loan, rather than 100%.
- Interest rates are set by the lender, rather than a set rate of 2.5%.
- The application process can be more onerous, rather than just making a self-declaration.
- Repayment terms are stricter, with, for example, no automatic repayment holiday.
The CBILS runs until 31 January 2021, although, with lenders reporting high levels of demand, don’t wait to apply.
Details of how to apply for a CBILS can be found on the British Business Bank’s website.
Photo by Matthias Kinsella on Unsplash
Bounce Back Loan Scheme Extended
The application date for the Bounce Back Loan Scheme (BBLS) has now been extended to 30 November, and the loan repayment process made more flexible.
To date, the BBLS has provided more than a million loans between £2,000 and £50,000 to businesses affected by the Covid-19 crisis.
Businesses can borrow up to 25% of their annual turnover, subject to a maximum loan of £50,000. Loans are 100% guaranteed by the government and are interest-free for the first 12 months, with no personal guarantees required. After 12 months, the annual interest rate is set at a very attractive 2.5%.
Flexible repayments
The original terms of the BBLS required repayment over six years. The new terms provide for more flexibility:
- The repayment period can be over ten years, although full repayment can be made at any time without penalty.
- It will be possible to make interest-only repayments for periods of up to six months. This option can be used three times.
- A business can suspend repayments altogether for up to six months. This option can only be used once.
What can a loan be used for?
The BBLS was introduced quickly and relied on self-certification rather than extensive credit checks. There is little restriction on what a loan can be used for, so long as it benefits the business.
Even if you are unsure whether additional business finance is required, there is no downside to having the funds sitting unused for a year and then repaying in full. Alternatively, an interest-free bounce back loan could be used to repay existing finance, which is likely to be much more costly.
Additionally, the loan can be used to support your personal income, considering it drawn from self-employment, or remuneration/dividends from a company.
Not surprisingly, the BBLS is expected to result in widespread fraud, with the government unlikely to receive value for money.
The BBLS application process can be found here, along with a link to accredited lenders.
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Insolvency Bill To Help COVID-19 Affected Businesses
A new Corporate Insolvency and Governance Bill, introduced on 20 May, will amend insolvency and company law to support businesses in distress from the impact of the COVID-19 pandemic.
The Bill, to be fast-tracked through Parliament, includes some measures which have been previously announced, but are now being enshrined in law. The aim is to provide businesses with the flexibility and breathing space they need to continue trading during the current crisis. Three key measures are a moratorium period, protection from legal action against Covid-19 debts and relaxation of AGM and statutory accounts requirements.
Moratorium period
The introduction of a new moratorium period will give companies a 20-business day breathing space from their creditors to explore rescue options. This can be extended to 40 business days, with further extensions at the agreement of creditors or the court.
The company will remain under the control of its directors during the moratorium, although the process will be overseen by a licensed insolvency practitioner.
Covid-19 related debts
Temporary measures will prevent aggressive creditor action against otherwise viable companies struggling because of COVID-19.
Although commercial landlords have been prevented from enforcing the forfeiture of leases for unpaid rent, some landlords have resorted to other measures.
There is a temporary relaxation of the wrongful trading rules so that directors can continue trading through the crisis without the threat of legal action. This measure will run from 1 March to 30 June.
Meetings and filing requirements
Backdated to 26 March, a company that has held an AGM adhering to social distancing measures, but not meeting the company’s constitution, will be treated as having complied with the law. If a company has been forced to postpone an AGM after 26 March, they will be allowed to hold the meeting (socially distanced if necessary) up to the end of September.
Companies House has already said that companies can apply for an automatic three-month extension to file statutory accounts, and the Bill adds automatic extensions for confirmation statements and changes of details.
Detailed explanatory notes published in conjunction with the Corporate Insolvency and Governance Bill can be found here.
Bounce Back Loans
Interesting article on another one of the government’s initiative to ensure the cashflow of small businesses do not dry up #bouncebackloans. Confirms my personal suspicions on the future direction of this government initiative to help #smallbusiness cope with the anticipated damage the #coronavirus #lockdown will have on SMEs.
The shocking part of the article, if, as the article states, anecdotal evidence suggests, is the allegation that up to 50% of business owners interviewed are taking out loans knowing they’ve no intention of paying it back.