Why is my Company Bank Account Frozen?

Logging into your online banking system to find your company bank account frozen may come as a shock to some people. There are, typically, several reasons that this may happen. However, the most common will be that a winding up petition has been advertised in The Gazette.


Why is my Company Bank Account Frozen?

The most common winding up petition will generally be a HMRC petition, as they are more inclined to use this tool than other creditors. This article will cover the reasons why your company bank account may be frozen, and what to do.

Why is my company bank account frozen?

Company Bank Account Frozen

As stated, the main reason you may find your company bank account frozen will be a winding up petition has been advertised in The Gazette. However, there are other reasons your bank account is frozen:

  • You have breached your credit agreement with your bank
  • A freezing order has been obtained by one of your creditors
  • The company has given notice of another insolvency procedure, such as voluntary liquidation or even a voluntary arrangement

While there isn’t a legal requirement for the bank to freeze the account, there is legislation within the Insolvency Act. This means that any asset dispositions after the presentation of a winding up petition are void unless a validation order is obtained from the court. To avoid criticism from an appointed liquidator, the bank will freeze your company account. This then makes it almost impossible to continue to trade.

What are my options with my company bank account frozen?

Discovering your company bank account frozen tends to limit the options available for you to deal with the winding up petition. Options available can include:

 

In the case of an HMRC petition, it may be that the company has too larger issue to rescue in its current form. If you wish to just walk away from the business, you may choose to allow the winding up petition to proceed. Alternatively, if you wish to resurrect the business, you may opt to instruct an insolvency practitioner to place the company into voluntary liquidation to facilitate the transition. If there are funds in the frozen business bank account, they will, most likely, agree to take their fees from these funds post-liquidation.
If you choose to deal with the winding up petition through any of the first three options, with your bank account frozen, it is likely that you will need to obtain a validation order to allow some payments to be made.

Can I obtain a validation order?

The purpose of a validation order is to allow payment to be made, usually from a frozen bank account, where there is a winding up petition outstanding. If a company enters liquidation as a result of a winding up petition, the liquidator will be able to recover any payments made from the date of presentation in the provisions of the Insolvency Act. A validation order is, effectively, the court rubber stamping these payments to allow them to go ahead.

The court will only provide a validation order if it can be demonstrated that the payments are in the best interests of the company, and its creditors. Even if you do not have the issue of the bank account being frozen, you should still seek a validation order to ensure you are not exposed. Validation orders may be obtained retrospectively. However, recent case law has demonstrated this is increasingly difficult. It is, therefore, advisable to obtain a validation order ahead of the transaction to avoid personal liability.

Company Voluntary Arrangement v Creditors Voluntary Liquidation

If you wish to avoid entering liquidation via a winding up petition, yet still require an insolvency process, it is important to consider your options. Where a winding up petition exists, administration is, generally, a prohibitively expensive option, due to the court hearing requirements to enter the process. This leaves the processes of voluntary liquidation or a company voluntary arrangement. The below table sets out some of the considerations about the two processes.

 

Process CVL CVA
Creditor Approval No creditor approval needed to commence  process Over 75% of voting creditors required to approve the proposals
Continuity Business will cease to trade, but assets may be purchased by a new entity Business can continue trading
Cost to Company Initial payment of fees. Assets will be realised Contributions based on cash flow for 5 years
The Debts Position Debts comprise part of the liquidation immediately Debts only satisfied after successful completion of the arrangement
Speed Company can enter liquidation in just over a week Will generally take a month to prepare and propose
Legal Actions No further action generally taken on receipt of notice Legal action can be taken until the CVA has been approved

 

However, it should be noted that where a creditor has had to resort to issuing a winding up petition, they may not feel you are likely to comply with the terms of a CVA. This is, particularly, the case with an HMRC petition.

Conclusion

With your company bank account frozen, even just for a short time, your company can be suffering from serious problems trading forward. Regardless of the position, it is important to take advice as soon as possible to protect yourself from personal liability. This can be done quickly and confidentially by contacting one of our business rescue experts.

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