A Business Needs to Take Action on a Frozen Bank Account But it Can Survive

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Published: 14th December 2010
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Copyright (c) 2010 Alison Withers

When a bank takes action to freeze a company's bank account it means 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 trigger for a bank account freeze is when there are insufficiant funds in the account which makes it effectively frozen even if the bank has not done this formally. It is most likely to occur when the company is not paying any money into the account, perhaps because the 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, when survival is uncertain, directors must manage a company in the best interests of the 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. Money was continuing to come into the company from customers, but it could not access 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. Meanwhile a validation orders approac was used to allow funds to be released by the bank in order to meet the busines' 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.


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When a bank takes action to freeze a company's bank account it does not mean the business has to go under. Taking action with the help of a business rescue adviser can make all the difference to a company's survival. Writer Ali Withers talked to Tony Groom of K2 Business Rescue.

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