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Validation Orders and Good Faith

Author: Nigel Cook

The case of Wilson and 375 Live Limited v SMC Properties Limited was an application for a Validation Order under Section 127 of the Insolvency Act 1986. It was heard by Mr Registrar Briggs. The case involved 375 Live Limited taking a bridging loan and granting a mortgage over freehold property to the lender as security. Under pressure from the lender the company sold the property unaware that prior to completion of the sale HMRC had presented a winding up petition. The purchaser applied to Court for a retrospective Validation Order which was opposed by the liquidator who claimed that the property had been sold at an undervalue and the transaction declared void.

The Registrar exercised the Court’s discretion to grant the Validation Order and reaffirmed the summary of the principles governing the exercise of the Court’s discretion as laid down in Denney v John Hudson & Co Limited 1992 BCLC 901.

In particular the policy underlying Section 127 is the pari passu distribution of the company’s assets and transactions should not be validated if it would result in pre-liquidation creditors getting paid in full at the expense of other creditors. The fact that the disposition was made in good faith was an important factor but must be weighed against the interests of all creditors. On the facts the Registrar noted that the evidence on value suggested that any undervalue was within an acceptable margin of error and the general body of creditors had not suffered.

For further information contact Nigel Cook on 01306 502294 or by email n.cook@downslaw.co.uk.