Validation orders after a winding up petition

Once a winding up petition has been presented, any payment or transfer of the company’s property can be made void if the court later makes a winding up order. Banks freeze accounts to avoid being caught by that rule, so a company that wants to keep trading while it fights or settles the petition has to ask the court for a validation order under section 127 of the Insolvency Act 1986.

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Why does a winding up petition freeze the company’s bank account?

Section 127(1) of the Insolvency Act 1986 says that in a winding up by the court, any disposition of the company’s property, any transfer of shares and any alteration in the status of its members made after the commencement of the winding up is void, unless the court orders otherwise. Section 129(2) then deems a compulsory winding up to commence when the petition was presented, not when the order is made. The only exception is where the company had already passed a resolution for voluntary winding up, in which case the winding up dates from that resolution (section 129(1)).

The effect works backwards. The official receiver’s technical guidance explains that payments made after presentation are valid when they are made, but become void retrospectively if a winding up order follows. Nobody knows at the time of the payment whether it will survive.

Banks are directly exposed. According to the same guidance, money paid into an account in credit after the petition is treated as a disposition, and where the account is overdrawn, receipts that reduce the overdraft are dispositions that the liquidator can recover from the bank. Payments out of an account in credit are recoverable from the payee rather than the bank. A bank that keeps operating the account once it knows of the petition is therefore taking a risk it does not need to take, which is why accounts are usually frozen as soon as the petition comes to light.

When does the petition become public?

Rule 7.10 of the Insolvency (England and Wales) Rules 2016 requires the petitioner to give notice of the petition in The Gazette. Where the petitioner is a creditor, the notice must appear at least seven business days after the petition is served on the company and at least seven business days before the hearing. The court can dismiss a petition that is not advertised properly.

The official receiver’s guidance notes that advertisement is treated as notice to the whole world, and that someone arguing they did not know of the petition will normally need to show the transaction happened before it was advertised. The period between service and advertisement is the company’s best chance to pay, agree terms with the petitioner or prepare a validation application before its bank and suppliers find out.

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What does a validation order do?

A validation order is the court “otherwise ordering” under section 127. It confirms that a particular payment, a class of payments or continued trading in general will stand even if the company is later wound up. The official receiver’s guidance says an application can be made before or after the transaction, and can seek approval in advance for a specific disposition or for the business to continue trading. Anyone with a discernible interest can apply, including shareholders and creditors.

The Act itself sets no test. The guidance records that the courts treat it as an ordinary judicial discretion, and summarises the factors that have emerged from the cases.

How does the court decide whether to validate?

The official receiver’s technical guidance (chapter 32) describes these principles:

Benefit to creditors as a whole. The court’s primary concern is whether the transaction will benefit, or did benefit, the general body of creditors. A payment that favours one creditor or a group will not normally be validated without special reasons.
Continued trading. The court may validate trading generally where it preserves the business so that it can be sold as a going concern, but validation is unlikely where the company is irretrievably insolvent.
Fair value. Sales of assets at full market value tend to be approved because they do not reduce what is available to creditors. Transactions at an undervalue are unlikely to be validated.
New transactions. Where goods are supplied and paid for entirely after the petition, at equal value, the court will normally validate.
Old debts. Paying pre petition debts is normally refused, unless the payment helps creditors generally, such as clearing lease arrears so that a valuable lease can be sold rather than forfeited.
Good faith. Payments made in good faith, in the ordinary course of business and without knowledge of the petition have tended to be validated, unless they look like an attempt to prefer the recipient.

How does a company apply?

The application is made to the court dealing with the petition using an application notice. HM Courts and Tribunals Service publishes Form IAA, made under rule 1.35, for all insolvency applications other than administration applications, winding up petitions and bankruptcy petitions. The petitioning creditor should be told about the application so it can respond.

A credible application usually includes up to date management accounts, a cash flow forecast for the period until the hearing, a list of the payments the company wants to make, and an explanation of why continued trading will not reduce the assets available to creditors. If the company disputes the petition debt or expects to pay it, the evidence of that belongs in the application too. Vague requests to “carry on as normal” without figures are unlikely to persuade a judge whose focus is the general body of creditors.

What are the alternatives to a validation order?

A validation order buys time. It does not deal with the petition itself. The other routes are:

Pay or settle the debt. Gov.uk guidance notes that creditors can withdraw a petition if the company pays or makes an arrangement to pay.
Administration. Under paragraph 40 of Schedule B1, a winding up petition is dismissed when an administration order is made and suspended while the company is in administration after an appointment by a qualifying floating charge holder. Section 127(2) disapplies the voiding rule for anything an administrator does while a petition is suspended. Directors cannot appoint an administrator out of court while a petition is pending (paragraph 25(a)) unless they filed their notice of intention to appoint before the petition was presented (paragraph 25A), so they normally have to apply to the court. See company administration.
A Part A1 moratorium. A company facing an outstanding petition cannot obtain a moratorium simply by filing papers. Section A4 requires the directors to apply to the court, which may grant it only if satisfied that it would achieve a better result for creditors than an immediate winding up. Section 127(3) protects things done during the moratorium. A moratorium is often a step towards a company voluntary arrangement.

What does this look like in practice?

Illustration only. A trading company owes a supplier £15,000. The supplier presents a petition on 1 March, serves it on 3 March and advertises it on 14 March. The company’s bank freezes its account on 15 March. The directors believe the business is viable and has a buyer in view, so they apply for a validation order covering wages, rent and new stock bought at normal prices, supported by a six week cash flow forecast. If the court grants the order, those payments are protected even if the company is later wound up. A payment the directors make on 20 March to clear an old debt owed to a friendly supplier would not be covered, and if a winding up order is made the liquidator could seek to recover it from that supplier.

What mistakes do directors make?

Assuming the risk begins with the winding up order. It begins on presentation of the petition.
Moving receipts to a new bank account or a director’s personal account. The money still belongs to the company and payments from it are still dispositions of company property.
Paying the petitioning creditor or other favoured creditors in full while others go unpaid, which the court is unlikely to validate and which may later be examined as a preference.
Waiting until the account is frozen before seeking advice, which wastes the days between service and advertisement.
Ignoring personal exposure. Directors who keep trading an insolvent company must consider creditors’ interests (see the creditor duty) and risk wrongful trading claims.

If the petition succeeds, the next stage is set out in our guide to compulsory liquidation. Whether the company is insolvent at all is a separate question covered in the insolvency tests.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.