Validation Order in Winding Up – sensible to consent for Solvent Companies?

Validation Order in Winding Up – sensible to consent for Solvent Companies?

Validation Order in Winding Up – sensible to consent for Solvent Companies?

Tuesday, 22 November 2016 17:28

By Anna Chan, Partner


When is a validation order required?

When a company is subject to winding up proceedings, the company’s properties including its bank account would be frozen and could not be dispensed with. To gain access to the company’s bank account in the meantime would require a validation order from the Court.

A mere procedural requirement for Solvent Companies?

The Court’s decision in Cheng Eric Tak Kwong v Emagist Group Limited & Others [2012] ruled that in cases where the winding up proceedings is derived from shareholders’ dispute, the Court would usually grant validation order for the company’s expenses made in the ordinary course of business to enable the proper functioning of the company “once the court is satisfied of the solvency of the company and the fact that it has an active and ongoing business.”

The Court is also has the view that the petitioner’s suspicion on how his fellow director ran the company and conducted its affair is not justification to turn an application for validation order more adversarial and complicated than is necessary. Such concerns of the petitioner can be alleviated in the validation order itself by conditions such as the company’s undertaking to provide a regular summary of expenses.

Unreasonable resistance to validation order. Non-sensible decision in case of Solvent Companies can be costly

In a more recent decision, Marrakesh Investments Ltd v Tangiers Holdings Ltd & Others [2016] (Unreported), the Court has further indicated that litigants should give a pragmatic and sensible approach in dealing with validation orders for solvent companies in order to avoid unnecessary urgent applications made to the Companies Court. In the future, the Court will be more inclined to make punitive costs order on indemnity basis if the petitioner does not sensibly consent to validation order.

What OLN can do for you

OLN has abundance of experience in advising and handling shareholders’ dispute and companies’ winding up matters. For a better understanding of how OLN can assist you, please feel free to contact our partner, Anna Chan.