Validation Orders under Section 284 Insolvency Act

The Court has recently upheld a refusal to validate payments to fund connected litigation where there was no evidence of a corresponding benefit to the bankruptcy proceedings.

An individual, subject to a bankruptcy petition he was contesting, failed to appeal the refusal of a validation order to cover funding connected proceedings in India.

The respondent banks had presented a petition based on a judgment obtained in India and registered in England.  There were ongoing proceedings between the parties in India and the applicant already had one validation order covering his reasonable living expenses, as well as both the past and future costs of his bankruptcy petition.  He sought a further validation order to cover the past and future costs of the Indian litigation as well which he said, if successful, would provide him with a defence to the petition. 

As a broad rule, when considering whether to validate payments, the Court needs to be satisfied the debtor was solvent or the transactions will be beneficial to or will not prejudice the interests of all unsecured creditors.  There is an exception to that rule (known as the Sinclair exception) to enable the person to take advice on the petition so the question was whether that exception could extend to the proceedings in India.  The answer, on the evidence, was no.

The Sinclair exception is narrow and whilst it could potentially extend to the Indian proceedings, weight had to be given to the interests of creditors.  There was no evidence to show what benefit those proceedings would bring to the bankruptcy proceedings in England – for instance, there was no breakdown of costs or detailed time scales and the limited available evidence suggested no substantive steps could be taken in India before the petition would be heard.

The decision is a reminder of how narrow the scope is for granting validation orders and of the importance of adequate evidence being before the Court when the application is made.

Mallya v State Bank of India [2021] 5 WLUK 388

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