How Lenders Can Protect Against Liquidation Demand Risk

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While there remains an exception for unpaid rent to a landlord, the expiration of the temporary measures means businesses risk seeing liquidation petitions brought against them for unpaid and undisputed debts of £750 or more. As a result, we are seeing a sharp increase in the number of liquidation petitions filed across all sectors.

The presentation of a request for liquidation presents a risk for the lenders of the company concerned. However, lenders can take certain steps to protect themselves from the impact of a liquidation petition.

Void Provisions

Any payment or disposition of property or assets made by a lender’s customer after a liquidation petition has been filed will be void on any subsequent liquidation, unless the court orders otherwise, and must be reimbursed to the liquidator. This is set out in section 127 of the Insolvency Act 1986 (IA86): “In a compulsory liquidation, any disposition of the property of the company and any transfer of shares or change in the status of members of the company, made after the commencement of the liquidation is, unless the court orders otherwise, void.

Lenders should be aware of and take precautions to ensure that they are not required to repay monies received from customers subject to liquidation petitions.

Examples of Void Provisions

Void provisions may also apply to the Lender. The lender may be required to repay the sums it has received from or on behalf of the customer in a subsequent liquidation. This could include payments made after the date of the request on overdraft accounts, loan repayments, or payments made under other financing agreements.

The lender will not be required to refund any monies paid into the customer’s credit account – the credit balance will be considered the customer’s property available to the liquidators. However, payments made from the customer’s bank account to third parties are likely to be affected by the restrictions under Section 127. This could be a risk to the lender if they are notified of the request and allow that these payments are made.

Bank account blocking

Due to the risks of void dispositions, it is common for lenders to “freeze” or close customer accounts as soon as they become aware of the liquidation request. The lender must also prevent any payment from being made to an overdrawn account.

Freezing bank accounts is the clearest and fastest way for the lender to mitigate its risk of authorizing or being party to payments that could be considered void if the client is subsequently liquidated. Freezing bank accounts can have a significant impact on the client’s ability to negotiate and can often cause friction with the client, so lenders should also consider the potential for validation orders and withdrawal of petitions in liquidation when approaching them in an emergency. base.

Validation orders

Post-petition payments can be confirmed by asking the court for a validation order. If a validation order is granted, the payments subject to this order will not be reversed upon a subsequent liquidation of the client, and the lender may “unfreeze” the bank account to allow the execution of these payments.

Obtaining a validation order will often need to be done urgently to allow the customer to make the critical payments needed to continue their business. This is also an avenue available to the lender if they have received a post-demand payment from the customer which may become zero.

To obtain a validation order, the client will have to demonstrate that the requested payments are business-critical and are necessary for the benefit of all creditors or for exceptional circumstances. Cash and financial evidence is often required by the court to validate payments. Successful candidates will depend on the circumstances. However, they will generally be successful if the payments are shown to promote a benefit to the business and are not detrimental to its creditors.

Validation orders will generally not be granted if the requested payments benefit the directors or related creditors, rather than the creditors as a whole – such as a reduction of a director’s liability under a personal guarantee or reimbursement of an intragroup loan.

Withdrawal of a petition for liquidation

If the petition debt is undisputed and the client has the ability to pay the entire debt, payment should be arranged as soon as possible. If the petition debt is fully satisfied, the petition can be withdrawn and the risk of liquidation will disappear – in which case a validation order may not be necessary.

If a petition debt is paid in full before the petition has been published and no creditor has come forward in opposition or support, the petition may be withdrawn by application to the court.

How quickly a petition is withdrawn depends on whether it has already been announced. The advertisement may take place as early as seven working days after the notification of the request to the client. If the petition is published, it cannot be withdrawn or dismissed until the petition hearing date, which can be four to six weeks later.

This is the case even if the petition debt is fully settled well before the hearing date. This will destroy value for the company and could accelerate its insolvency. Therefore, it is essential that the lender works with the customer to obtain an express commitment from the creditor that they will not release the application in circumstances where the debt of the application must be repaid in full.

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