On this side of the terrestrial divide, the most popular form of insolvency proceedings in Nigeria is Winding-Up. There is an increasing spate of winding up proceedings across the various divisions of the Federal High Court of Nigeria[1] in recent times. This cannot be divorced from the growing trend of corporate failures arising from the economic situation of the country occasioned by the recent recession experienced by the polity and the apparent dearth of a corporate rescue culture. Interestingly also, the commonest form of winding up proceedings in Nigeria is compulsory winding up, otherwise known as winding up by the court. For the hitherto reasons, the most popular ground for winding up is, consequently, the inability to pay debt by corporates, as they fall due.

The popularity of this ground was identified by the Court of Appeal, per Nweze, JCA in Gbedu v. Itie[2] thus:

Section 408 stipulates grounds on which a company may be wound up by the court, C.B.D.I. v. COBEC (Nig.) Ltd [2004] 13 NWLR (Pt. 890) 376 @ 391. Of these grounds for winding up in Section 408(a) (b) (c) (d) and (e), the most important is Section 408(d) which relates to the inability of the company to pay its debts, Unifam Ind. Ltd v. Oceanic Bank Int’l (Nig.) Ltd [2005] 3 NWLR (Pt. 911) 83,98.

This ground has, thus, been described as “the case of corporate insolvency which accounts for the overwhelming majority of winding –up case” J. O. Orojo, Company Law and Practice in Nigeria (Fifth edition) (London: Butterwoths, 2008) 451

Indeed, winding up for inability to pay debt accounts for the majority of winding up cases in our courts. These proceedings are initiated frequently, for good and sometimes, for bad reasons by creditors whose debts had remained unpaid by companies. The proceedings have also increasingly, though unfortunately, remained a potent tool for debt recovery. The statutory preconditions stipulated by the Companies and Allied Matters Act (CAMA)[3] for initiating such process is very simple. The requirements of Section 409(a) of CAMA are that the company must be indebted to the creditor in a sum exceeding N2,000.00 (Two Thousand Naira) only; that a letter of demand must have been issued by the creditor and served at the registered office or head office of the company and that the company must have, for three weeks after service of the demand letter, neglected to pay the sum indebted or compound for it to the reasonable satisfaction of the creditor. When all these pre-conditions have been met, a petition may be filed by the creditor against the company for winding up.

The Avoidance of Disposition Rule

The initiation of a winding up proceeding puts a company in a very serious difficult position. Apart from the obvious fact that such proceedings automatically constitute events of default and may immediately trigger acceleration of loan and other credit facilities which the company may be enjoying, there is a more serious statutory effect provided in CAMA, like in all other insolvency laws of many jurisdictions across the globe.

Section 413 of CAMA provides that:

In a winding up by the court, any disposition of the property of the company, including things in action and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding up shall, unless the court otherwise orders, be void.

The Court of Appeal, per Omokri, JCA in Utuk v. The Liquidator, Utuks Construction Marketing Company Ltd. & Anor,[4] confirmed and restated the law as follows:

“By virtue of section 413 of the CAMA any disposition of property of the company, including things in action and any transfer of shares, or alteration in the stating of the member of the company, made after the commencement of the winding up shall be void

The effect of the provision of Section 413 of CAMA is that a company in a winding up proceeding by the Court cannot dispose of its property, transfer its shares or alter the status of its members during the pendency of the winding up petition. It is also instructive to note that the language employed by the law is “shall” which connotes compulsion, direction and obligation. It is settled law that the use of the word “shall” in statutes and contracts implies a mandatory obligation. In Guy & Co. Prop. Ltd. v. Kio-Lawson[5], the Court of Appeal stated the law as follows:

“The word ‘shall’ is a word of command and it denotes direction, compulsion, a mandate, an obligation and gives no room for discretion. In whatever way it is used, whether in a mandatory or directory sense, there has to be a fulfilment of such mandate or directive as in the case under consideration. See the cases of M.H. Tanko v. E. Caleb & 3 Ors. (1999) 8 NWLR (Pt. 616) page 606, Captain E.C.C. Amadi v. N.N.P.C. (2000) 5 WRN 47; (2000) 6 SCNJ 1; (2000) 49 LRCN 1951; (2000) FWLR (Pt. 9) 1527; (2000) 10 NWLR (Pt. 674) page 76, A.L. Abimbola v. I.E. Aderoju & 3 Ors. (1999) 5 NWLR (Pt. 601) page 100”

Thus, the import of Section 413 of CAMA is that a company in winding up is otherwise prevented from making debit transactions from its bank accounts, paying salaries of its employees and other bills, trading and making payments to suppliers and what more. This has a far-reaching effect on such a company; its operations and its entire workforce.

It is interesting to note that the relevant time for such dispositions to be void is from the period of commencement of winding up. Section 415(2) of CAMA defines the period at which winding up by Court is deemed to commence. It provides that: “the winding up of a company by the court shall be deemed to commence at the time of the presentation of the petition for winding up”. The implication of the foregoing is that for the anti-disposition rule to have effect, it is not necessary that a winding up order has been made, and it is in fact not a requirement that any material step should have been taken by the petitioner other than the filing of the winding up petition. From the moment a winding-up petition is filed before a Court, any disposition of the asset of the company or transfer of its shares or alteration of the status of its members becomes void.

The rationale behind this rule which has equivalent provisions in the insolvency laws of many jurisdictions across the globe is founded on the primary objective of insolvency law. Undoubtedly, insolvency laws are designed to prevent dissipation of the assets of an insolvent estate and overreaching of its creditors while the principal goal is the collectivisation and realisation of all the assets of an insolvent company for fair and equitable distribution to all its creditors pari passu. This is known as the Pari Passu principle and the rule reigns supreme and lies at the heart of insolvency law. Section 413 therefore seeks to preserve the assets of a company and to prevent one creditor from being paid in priority to another in order to protect the Pari Passu rule.

The Importance of Validation Orders

It is evident that the avoidance of disposition rule in Section 413 of CAMA has significant effects and far reaching consequences on the business of a company in winding up. It is also not in doubt that the rule itself is an easy tool in the hands of a petitioner desirous of forcing the payment of a debt owed by the company being wound up. Further, the principle has the effect of putting innocent third parties in serious difficult positions particularly if a winding up order is eventually made and the dispositions made by the company are voided. It is for this reason that the anti-disposition rule is never an absolute rule without exceptions provided by law to cater for special circumstances.

In developed jurisdictions, the practice of banks upon becoming aware of the presentation of a winding up petition against a company is to immediately proceed to freeze the company’s accounts to prevent dispositions at winding up, and eventual liability for such dispositions where they become voided by the liquidator. To prevent this scenario, a respondent company being faced with a winding up process, to be able to continue trading and for making regular payments in the ordinary course of business, will also typically seek the grant of an application for Validation Order from the court where the winding up proceeding has been initiated. A Validation Order is an order of court validating transactions and transfers into and out of the company’s bank accounts in the ordinary course of business.

In Nigeria, the legal and statutory basis for seeking a Validation Order from the Court in the face of presentation of a winding up proceeding derived its source, validity and authority from the provision of Section 413 of CAMA. It is instructive to note that while Section 413 of CAMA provides for the avoidance of disposition rule in winding up, it contains a proviso which creates an exception by providing for the Court’s discretion to order otherwise. For emphasis,

Section 413 of CAMA is again reproduced below, ipsissima verba:

In a winding up by the court, any disposition of the property of the company, including things in action and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding up shall, unless the court otherwise orders, be void.

The underlined portion of the provision of Section 413 is the basis for filing an application for and seeking Validation Orders from the Court in the course of winding up proceedings. The purpose is to enable the respondent company carry out transactions which are in the ordinary course of business. Thus, a disposition by the company will not be void if the court makes a Validation Order in favour of the company being wound-up. A Validation Order can be sought prior to the winding up of the company (and ideally before the company enters into the disposition) or retrospectively after the winding up order has been made. Retrospective applications are quite often made in response to a challenge by the liquidator to the disposition.

The leading English authority of Re Gray’s Inn Construction[6] appears to have provided light and guidance on the subject. Buckley, L.J. delivering the judgment of the Court stated the law as follows:

“It is a basic concept of our law governing the liquidation of insolvent estates, whether in bankruptcy or under the Companies Acts, that the free assets of the insolvent at the commencement of the liquidation shall be distributed rateably amongst the insolvent’s unsecured creditors as at that date…There may be occasions, however, when it would be beneficial, not only for the company but also for its unsecured creditors, that the company should be enabled to dispose of some of its property during the period after the petition has been presented but before a winding up order has been made. An obvious example is if the company has an opportunity by acting speedily to dispose of some piece of property at an exceptionally good price. Many applications for validation under the section relate to specific transactions of this kind or analogous kinds. It may sometimes be beneficial to the company and its creditors that the company should be enabled to complete a particular contract or project, or to continue to carry on its business generally in its ordinary course with a view to a sale of the business as a going concern. In any such case the court has power under section 227 of the Companies Act 1948 to validate the particular transaction, or the completion of the particular contract or project, or the continuance of the company’s business in its ordinary course, as the case may be. In considering whether to make a validating order the court must always, in my opinion, do its best to ensure that the interests of the unsecured creditors will not be prejudiced

The above classic exposition of the Court in the celebrated case highlighted the importance of, and rationale for seeking a Validation Order in insolvency proceedings. The Court emphasised that the basic foundation for the law governing liquidation is the Pari Passu principle and that the court should only deviate from this principle and grant a Validation Order when special circumstances render it beneficial to the company and its creditors. A Validation Order will therefore validate such transactions and payments made in the ordinary course of business for proper value. It does not however cover exceptional transactions outside the ordinary course of the business.[7]


The New State of the Law – Less Emphasis on Good Faith and Ordinary Course of Business Requirements

The English Court of Appeal in the recent case of Express Electrical Engineers Ltd v Beavis[8]  reviewed the conditions for the grant of a Validation Order. Prior to this decision, it is generally believed in the insolvency world that a Validation Order may be granted by the Court once the transaction sought to be validated is in the ordinary course of business and the disposition sought to be validated is made or will be made in good faith. The Court however redefined the scope of the law on the subject. In this case, a company paid a creditor £30,000 one week after a winding up petition had been presented against it and at a time when the parties were unaware of the petition’s existence. After a winding up order was made, the liquidator sought a repayment of the £30,000 paid during the pendency of winding up while the creditor, on the other hand, applied for a Validation Order. The County Court and High Court both refused to grant a Validation Order and an appeal was filed at the Court of Appeal. The Appellant’s counsel argued that a basis for granting a Validation Order is – Good faith. The learned counsel argued that unless there are grounds to suspect that a transaction was made in an attempt to prefer (i.e. treat better) one creditor above the general body of creditors, the court should necessarily validate a good faith disposition made in the ordinary course of business at a time when the parties are unaware a petition has been presented. The Appellants placed heavy reliance on the dictum of Buckley LJ[9] in Gray’s Inn Construction case.[10] However, the Court of Appeal per Sales LJ considered that Buckley LJ did not in the Gray’s Inn Construction case lay down a binding rule, and that the expression relied on by the Appellant on good faith was strongly caveated so as to be easily displaced and that the heavy reference to the Pari Passu rule in that case which permeate throughout that judgment overwhelmed this inconsistent comment. His Lordship, Sales LJ[11] thus held as follows:

“The true position is that, save in exceptional circumstances, a validation order should only be made in relation to dispositions occurring after presentation of a winding up petition if there is some special circumstance which shows that the disposition in question will be (in a prospective application case) or has been (in a retrospective application case) for the benefit of the general body of unsecured creditors, such that it is appropriate to disapply the usual pari passu principle”

The Court of Appeal in Express Electrical Engineers Ltd v Beavis[12] outlined examples of when the court may be justified in making a Validation Order. The Court suggested that the Order would be appropriate if the payment would enable the company to complete a particular contract for which the eventual profits will exceed the outlay. It was further held that a Validation Order may also be justifiable if a disposal would allow the company to carry on the ordinary course of business when this is desirable for the general body of creditors. Desirability will normally depend on whether the sale of the business as a going concern will likely be more beneficial than a break-up realisation of the company’s assets. The Court emphasised that a court of law should not grant a Validation Order simply because the disposition was made in good faith and without the knowledge of the existence of the petition and instead, a Validation Order should only be made if “special circumstances” exist. “Special circumstances” will require the disposition to have benefited the general body of unsecured creditors as a whole in order to override the pari passu principle.

It is therefore clear that the evidential burden required to urge the court to make a Validation Order remains high, particularly for those sought retrospectively. Significantly, the applicant must prove that the disposition has or will benefit the general body of creditors. If the basis of the application is that the transaction was to enable a contract to be fulfilled, it must be demonstrated that this would be profitable enough to outweigh the payment; if the order is sought to facilitate the sale of the company as a going concern, the applicant must prove that this sale would be of greater benefit to the creditors than a break-up.

The Application Process for a Validation Order – Practice & Procedure

As a preliminary point, reference must be made to Order 5 of the Companies Winding-Up Rules, 2001 which provides as follows:

Every application in Court other than a petition shall be by motion, notice of which shall be served on every person against whom an order is sought not less than five clear days before the day named in the notice for hearing the motion.”

Further, Order 26(3) of the Federal High Court (Civil Procedure) Rules, 2009 provides as follows:

Every motion shall be supported by an affidavit setting out the grounds on which the party moving intends to rely and such motion shall be filed along with a written address

Accordingly, an application for a Validation Order shall be by way of motion on notice, supported by an affidavit and a written address. The application will on the face of the motion paper seek an order validating the particular transaction either before the transaction or retrospectively. A general Validation Order may also be sought for validation of transactions in the ordinary course of business. The supporting affidavit will state the date when the petition was filed, why the petition was issued and the circumstances. The affidavit will also depose to facts as to whether the petition debt is admitted or disputed and, if the latter, brief details of the basis on which the debt is disputed.

It is also necessary for a supporting affidavit in an application for Validation Order to give the full details of the company’s financial position including details of its assets with documentary evidence as well as a cash flow forecast and profit and loss projection for the period for which the order is sought. The details of the payments sought to be validated must also be included in the application as well as the reasons necessitating such payments or dispositions. Any other information relevant to the exercise of the court’s discretions in favour of the applicant must as well be contained in the supporting affidavit. In accordance with the practice and procedures at the Federal High Court and the clear letters of Order 26(3) of the Rules of the Court, the application must also be supported by a Written Address arguing the legal basis for the grant of a Validation Order and how the legal requirements have been met.



From our experience, there is rarity of applications by respondent companies in winding up proceedings seeking validation orders before the Nigerian courts. It is confounding that notwithstanding the importance and necessity of seeking a Validation Order at winding up, such applications are uncommon and unpopular in Nigeria. The reason for this unpopularity is unknown but suffice to say that the risk of not seeking a Validation Order when a company is undergoing insolvency proceeding is enormous. Such risks are not only for the respondent company undergoing a compulsory winding-up but also for third party creditors who are beneficiaries of such dispositions during insolvency proceedings. Banks are also at risk of being required by a liquidator after a winding-up order, to repay unlawful dispositions made by a company during the pendency of a winding-up proceeding. There is therefore an onerous responsibility to avoid unlawful dispositions by companies undergoing compulsory winding-up proceedings, particularly where such proceedings have been publicly advertised in accordance with an order of a Court. This article therefore advocates for the popularity of applications for Validation Orders, the necessity for companies undergoing insolvency proceedings to timeously apply for same and the need by our courts to regulate the practice and procedure for seeking same in accordance with global insolvency practices.

[1] The Court having exclusive jurisdiction on winding-up cases is the Federal High Court – Section 407 of the Companies and Allied Matters Act, 2004.

[2] [2010] 10 NWLR (Pt. 1202) 227 @ 259 – 260

[3] CAP C20, LFN, 2004

[4] (2009) LPELR-4322(CA)

[5] (2007) WRN Vol. 43. 138 at 155 – 156 lines 30 – 35

[6] [1980] 1 WLR 711 @ 719

[7] See Re Burton & Deakin Ltd [1977] 1 WLR 390.

[8] [2016] EWCA Civ 765.

[9]   [1980] 1 WLR 711 at p 718F-G

[10] In Express Electrical Engineers case (Supra)

[11]   Ibid at [56].

[12]   Ibid