Published on 26 November 2010 by Tony Groom

If a bank takes action to freeze a company’s bank account it is an indication that the bank is nervous and under its bank facility terms and conditions has exercised its right to not release funds.

A bank’s behaviour is monitored by its facility people and triggering action to freeze does not imply any expression of judgement or opinion on the business itself.

There are two other circumstances that can trigger a bank account freeze.

The first is when a winding up petition is advertised in the London Gazette, which is a legal requirement before a petition can be heard in the High Court. In this situation the bank is required to freeze the business account because the bank can be held to be liable for any funds paid out of the account.

A second situation that can trigger a bank account freeze is when there are not sufficient funds in the account, which makes it effectively frozen, even if it hasn’t been done formally by the bank.

It is most likely to happen because the company is not paying money into the account, possibly because its factoring company is not remitting funds to the bank.

A company’s relationship with its bank is aggravated if the company fails to take steps to deal with this situation, putting the bank in the embarrassing position of having to return cheques or direct debits.

Payment returns can also cost a company a great deal of money, adding to the pressure on its cash flow by charging fees but it also causes the bank to more actively monitor the account because the company’s directors are failing to manage it within the facility that has been agreed.

In a situation like this when there are insufficient funds but the bank account is not formally frozen, the directors need to take prompt action, including stopping the release of cheques, cancelling all standing orders and direct debits and taking control of the cash to manage all future payments. This creates a hiatus period during which cash is only released if there are sufficient funds

During this hiatus period when survival is in jeopardy, directors must manage the company in the best interests of creditors. Payments are only made to meet ongoing costs and those crucial liabilities that need to be paid for to keep the business going. If, however, the bank account has been formally frozen the directors can only make payments either with the bank’s approval or with an order from the courts.

Where an account is frozen by a winding up petition it is normal for a specialist to assist the company to obtain a validation order by which the bank is authorised by the court to make payments which are normally specified by the order. The validation order by the court releases the bank from its liabilities for payments while there is an outstanding winding up petition.

In one recent case a debt collecting solicitor abused the winding up process to use it as a means of collecting a disputed debt by trying to force a company to pay the disputed debt.

The company involved had more then £100,000 in its bank account and the disputed debt was £18,000 but despite this the solicitor’s action meant its bank account had been frozen. Customers were continuing to pay money to the company but the latter could not access any of it.

The company, however, brought in a business rescue adviser who took over as a director of the company during the winding up process in order to dispute the debt through the winding up court disputed debt procedure. This meant the dispute being heard in the courts while winding up petition remained outstanding and the bank account remained frozen. In the meantime the validation order approach was used to allow funds to be released by the bank to meet the business’ ongoing costs.

During the process, the adviser, acting as a director, did not pay any historical liabilities but was allowed to make ongoing payments for services, to staff, landlords, PAYE etc.

It meant that it was possible to keep the company going for eight months while the disputed debt was dealt with through the normal court procedure and in the end the petition was dismissed following judgement over the disputed debt which amounted to an abuse of process with an appropriate costs award.

However, it was a complex process that very few people have the knowledge to deal with and the assistance of a restructuring adviser made it possible for the business to survive.