With almost four decades of experience in business, Mike Smith is one of the founders of Company Debt and one of the UK’s most experienced mediators with HMRC.
Having previously owned several of his own successful companies and occupied senior roles as a director within both Legal and General and Sun Alliance during separate periods of his career, Mike founded Company Debt with a genuine desire to help stressed directors in challenging circumstances. He is also an expert in the alternative finance sector.
When your finance team receives a “payment refused” alert shortly after a winding-up petition becomes public, it is often the first sign the company’s bank has restricted the account. Banks commonly take protective steps once they become aware that insolvency proceedings may be underway.
If the court ultimately makes a winding-up order, control of the company’s assets, including its bank accounts, transfers to the Official Receiver or appointed liquidator. From that point, directors lose authority to operate the account and the liquidator takes control of the company’s funds.
Payments made after a petition has been presented may later be treated as void dispositions under Section 127 of the Insolvency Act 1986 if the court makes a winding-up order, unless the court has authorised them through a validation order.
This article is general information, not legal advice.
Will the bank freeze our company account, and when?
Banks are not legally required to freeze an account when a winding-up petition is filed. However, many banks restrict or suspend transactions once they become aware that a petition exists, because payments made after the petition date may later be challenged if a winding-up order is made.
The key legal issue is not the bank freeze itself, but the risk to payments made after the petition is presented.
Under the Insolvency Act 1986:
In a court-ordered winding up, the liquidation is deemed to commence when the petition is presented, not when the order is made.
Any disposition of company property after that date may be void if the court later makes a winding-up order.
Banks often monitor insolvency notices in The Gazette, which means restrictions frequently occur after the petition is advertised, but there is no statutory rule that requires a freeze at that moment.
Directors sometimes first notice restrictions when:
payments are rejected
direct debits fail
the bank requests information about the petition
If a winding-up order is made, the account will normally be placed fully under the control of the Official Receiver or liquidator.
Section 127: why post-petition payments can be void
Section 127 of the Insolvency Act 1986 provides that, in a winding up by the court, any disposition of the company’s property made after the winding up is deemed to commence is void unless the court orders otherwise.
Because the winding up is deemed to commence at the date the petition was presented, payments made during the period between petition presentation and the court hearing can be challenged if the company is later wound up.
This period is sometimes called the “gap period.”
If a winding-up order is ultimately made:
the liquidator may review payments made during this period
the court may treat those payments as void unless validated
This rule exists to prevent assets being removed from the company after formal insolvency proceedings have begun.
Example – A supplier is paid after a petition has been presented. If the court later makes a winding-up order, the payment may be treated as void unless the court had previously authorised it through a validation order.
Because of this risk, companies facing a petition often seek court approval before continuing ordinary trading payments.
Who controls the account once liquidation starts?
Once a winding-up order is made or a voluntary liquidator is appointed, directors cease to control the company’s assets.
Control of the bank account passes to:
the Official Receiver in a compulsory liquidation (initially), or
the appointed insolvency practitioner acting as liquidator.
The liquidator’s powers under the Insolvency Act 1986 include the ability to take custody and control of company assets.
Typical early steps include:
notifying the bank of the liquidation
requesting bank statements and account records
securing the company’s cash balances
transferring funds into the insolvency estate account
Directors must cooperate with the liquidator and provide financial information and records relating to company accounts.
Can we still make essential payments? Using a validation order
Companies facing a winding-up petition can apply to the court for a validation order.
A validation order allows specific payments or transactions to proceed despite the risk under Section 127.
These orders are typically considered where the proposed payments:
preserve the value of the company’s business
benefit creditors overall
allow the company to continue trading while the petition is being resolved.
The application is made to the court and normally requires:
a witness statement explaining the company’s financial position
bank statements and financial evidence
a draft order specifying the transactions requested.
According to GOV.UK guidance, the application fee is £155, and the form used is Form IAA.
If the court grants the order, only the transactions specified in the order will be protected.
Bank set-off rules: what if we owe the bank money?
If the company enters liquidation, Insolvency Rules 2016 Rule 14.25 requires an account to be taken of mutual dealings between the company and the creditor.
This means debts owed by the company and sums owed to the company are set off against each other, leaving only the net balance.
For example:
Scenario
Amount owed to company
Amount owed to bank
Result
Account in credit
£25,000
£0
£25,000 available to the liquidation estate
Loan outstanding
£2,000 credit
£10,000 loan
Net claim of £8,000 by the bank
Equal balances
£15,000
£15,000
No balance payable either way
After the calculation is made, the creditor proves for the net amount in the liquidation.
What happens to secured, trust or client funds?
Not all money held in company bank accounts forms part of the general insolvency estate.
Certain funds may be treated differently depending on the legal structure of the account.
Examples include:
Fixed-charge accounts
Where funds are subject to a valid fixed charge in favour of a lender, the charge holder may have priority over those funds once realised.
Floating-charge assets
Floating charges typically cover circulating assets such as cash in trading accounts. In liquidation, distributions from floating-charge assets are subject to statutory rules including the prescribed part reserved for unsecured creditors.
Client money held on trust
Where money is held on trust (for example in regulated client accounts), the funds generally belong to the beneficiaries rather than the company and are not available for general creditors.
The liquidator must review the legal status of the funds before distributing them.
How the liquidator banks the money: ISA and estate accounts
In compulsory liquidations, the Official Receiver and liquidators are generally required to pay money received into the Insolvency Services Account (ISA) operated by the government.
Under the Insolvency Regulations 1994, money must normally be paid into the account:
within 14 days of receipt, or
immediately if the amount received reaches £5,000.
In certain circumstances, and with appropriate authorisation, a liquidator may use a local bank account for the administration of the estate.
The ISA system provides secure centralised banking for insolvency estates.
Where the cash goes next: statutory distribution waterfall
Money collected by the liquidator is distributed according to the statutory order set out in the Insolvency Act 1986.
The typical order is:
Liquidation expenses – including the liquidator’s costs and statutory fees
Preferential creditors – mainly certain employee wage and holiday claims
Secondary preferential creditors – including certain HMRC debts
Prescribed part – a portion of floating-charge assets reserved for unsecured creditors
Floating-charge holders
Unsecured creditors
Statutory interest on proved debts
Shareholders
Because higher-ranking claims are paid first, shareholders rarely receive any distribution in insolvent liquidations.
Scotland and Northern Ireland: procedural differences
The overall legal framework for liquidation applies across the UK, but procedural rules vary slightly between jurisdictions.
Scotland
Scottish insolvency rules require liquidators to maintain detailed accounting records of estate transactions under the Insolvency (Scotland) Rules 2018.
Northern Ireland
Company liquidations in Northern Ireland operate under the Insolvency (Northern Ireland) Order 1989 and related procedural rules, although the overall structure of liquidation and creditor priorities broadly mirrors the system used in England and Wales.
Costly mistakes directors make with frozen accounts
When a company faces a winding-up petition or liquidation, certain actions can create additional legal risk.
Common mistakes include:
Moving money to personal or related accounts
Transfers made after a petition has been presented may be vulnerable to challenge if a winding-up order is later made.
Paying selected creditors ahead of others
Payments that favour certain creditors shortly before insolvency may be examined under insolvency law provisions.
Assuming a voluntary liquidation keeps accounts operating normally
Once a liquidator is appointed, directors lose authority to operate the company’s bank account.
Ignoring bank loans or overdrafts
Any credit balance may be set off against debts owed to the bank under insolvency set-off rules.
Opening new accounts to continue trading under the same company
This may create additional legal complications once insolvency proceedings are underway.
Directors should seek professional advice before making further payments if a petition has been presented.
FAQs
1) Will a creditors’ voluntary liquidation stop the bank from freezing the account?
No. Once a liquidator is appointed in a CVL, directors lose authority over the company’s bank account. The bank will usually act only on instructions from the liquidator.
2) Can I pay wages after a winding-up petition has been filed?
Payments made after the petition date may be at risk under Section 127 if the company is later wound up by the court. Companies often apply for a validation order if they need to continue making essential payments.
3) Does the bank have to warn me before freezing the account?
There is no statutory requirement for banks to provide advance warning. Banks may restrict accounts once they become aware of insolvency proceedings or a petition.
4) What happens to standing orders and direct debits?
If a bank restricts the account, outgoing payments such as standing orders and direct debits may stop. The precise handling depends on the bank’s internal procedures.
5) Can we open another bank account after a petition is filed?
Opening a new account for the same company can be difficult once a petition has been presented, and transferring company funds may create legal issues if a winding-up order is later made.
6) How long does it take to obtain a validation order?
Timing depends on court availability and the evidence submitted. Urgent applications may be considered quickly, but the timetable varies between courts.
7) What if the company bank account is overdrawn?
In liquidation, insolvency set-off applies to mutual dealings between the company and its creditors. This may result in the bank proving in the liquidation for the net balance owed.
8) Are personal guarantees affected by liquidation?
A director’s personal guarantee is separate from the company’s debt. If the company cannot repay the debt, the lender may still seek payment under the guarantee.
9) What happens if the winding-up petition is dismissed?
If the petition is dismissed, the company may provide the bank with proof of the court order so the bank can restore normal account access.
10) Can payments made before the petition advertisement still be challenged?
If a winding-up order is later made, the relevant date for Section 127 is when the petition was presented, not when it was advertised.
11) Do sole traders follow the same rules?
No. Section 127 applies to company liquidations. Insolvent sole traders follow the bankruptcy regime, which has different rules regarding bank accounts.
12) What happens to foreign-currency accounts?
Foreign-currency accounts are treated as company assets. The liquidator will usually convert funds into sterling when distributing the estate.
13) What happens if a dissolved company is restored?
When a company is restored to the register, the law generally treats it as if it had never been dissolved. Funds previously transferred to the Crown as bona vacantia may potentially be reclaimed.
14) Can HMRC be prioritised for payment before liquidation?
Payments made shortly before insolvency that prefer one creditor over others may be examined under insolvency law. Directors should seek advice before making selective payments.
15) Does Section 127 apply in a members’ voluntary liquidation?
No. Section 127 applies to winding up by the court. A members’ voluntary liquidation (MVL) is a solvent procedure.
Your safest next step
If a winding-up petition has been presented, directors should pause discretionary payments and seek professional advice.
An insolvency practitioner can quickly assess:
whether Section 127 risks apply
whether a validation order may be needed
how the company’s bank account will be handled if liquidation proceeds.
Early advice helps protect both the company’s creditors and the directors managing the situation.
