Published on 14 December 2010 by Tony Groom

The large number of companies in financial difficulties is swamping the banks and as a result there is a lack of experience in banks when dealing with companies in the process of restructuring.

If a company is subject to a Winding-up Petition (WUP) the bank can be held liable for any funds that are paid out of its bank account once the Petition has been advertised in the London Gazette. As a result banks tend to freeze the accounts of any company with an outstanding WUP as soon as they become aware of it. The only way for a company to free up money in a frozen account is via an application to Court for a Validation Order.

When attempting to save a company where there is no WUP, however, the lack of experience among banks means that in some instances they are behaving as if there were a WUP and this is getting in the way of attempts to restructure.

Rescue advisers are finding that once banks have become aware of an attempt to restructure they are now sometimes freezing a company’s account, thus further damaging its ability to trade. This is because banks do not understand the distinction between the various restructuring tools.

An example of where this is happening is when a Company Voluntary Arrangement (CVA) is being proposed.  The process of agreeing a CVA involves notifying creditors of the intention and allowing time for a meeting to be set up for creditors to approve the CVA proposals. Usually there is a hiatus period of at least three weeks between notification and the meeting, which allows creditors to consider the proposals and make any comments or request adjustments before the meeting.

However, banks’ inexperience of CVAs is leading some of them to freeze company accounts during the hiatus period and this has an adverse effect in that the company is no longer able to trade. While banks generally do not have the right to freeze their clients’ bank accounts unless there is either a WUP, an order by the Court or a breach of contract, they may take precautionary action out of fear when they don’t know what is going on. Concern about fraud can always be used to justify such an action. In such instances freezing an account would seem sensible irrespective of any legal or contractual rights of the client.

In practise it makes sense for a company to talk to its bank beforehand to let them know what’s going on. Where the company is overdrawn clearly the bank is a creditor and should be notified of any restructuring proposals, in particular where there is a CVA.

Where the company is in credit there is no statutory obligation on the company to notify its bank, however, there may be a contractual requirement, but whether or not there is an obligation, it makes sense to advise the bank to reassure them beforehand so as to avoid a ‘knee jerk’ reaction that might result in the account being frozen.

Some may question whether the banks can be trusted not to freeze an account if a company notifies them while it is in credit and assume that they cannot be trusted not to freeze an account in credit following such notification. However, when a company does not tell its bank, then the bank has grounds for believing that it has lost the confidence of the directors of their client company and trust between them is now an issue. Such trust issues get in the way of a relationship which is why business rescue advisers advocate always speaking to the bank before the bank finds out via other means.

In the current climate, the workload on the banks Insolvency Departments is heavy and this can mean a significant delay in resolving the situation when a bank does freeze an account. Far better to avoid the situation in the first place by engaging with the bank early in the rescue process.