When a business goes into liquidation, the bank account will be frozen. For directors and company owners that wish to remain operational, this can be an exceptionally challenging experience – trading is virtually impossible since they are unable to make any withdrawals or authorise transactions.
Even if the company isn’t insolvent, a frozen bank account may precipitate the state of insolvency very quickly.
Why do Banks Freeze Business Accounts?
There can be a number of reasons but one of the most common is when a winding-up petition has been served by a creditor. A creditor can take winding up action if they are owed £750 or more and the payment is at least 21 days late.
Petitions are shown in The Gazette, which is the official public record and this alerts banks, which then triggers the freezing of the account.
Outside of insolvency events, a bank may also freeze an account if it suspects fraud or if a business has run up large debts and is unable to stay within an agreed overdraft. Banks will want to protect against losses and also ensure they act within the law. Freezing an account means that company directors cannot withdraw funds for themselves that could be used to pay creditors, for example.
Can I Keep Trading with a Frozen Bank Account?
Whether it is for paying staff, bills or suppliers, a bank account is essential. So if the account is frozen, the business will come to a grinding halt.
Every circumstance is different however, and even if a firm is threatened with liquidation via a winding up petition, there may be ways to recover and unblock the account. But you’ll need to act decisively.
Can you Prevent a Business Bank Account Being Frozen?
The best way to avoid a frozen bank account is to pay attention to creditor demands immediatlely and halt the process of escalation.
Winding up petitions will have been preceded by a Statutory Demand. This is a written demand for payment and acts that a warning of court action and offers a 21 day demand period.
If the Statutory Demand is somehow missed and the creditor decides to proceed to a winding up, then there is another seven day period before the petition is advertised in The Gazette. During this time, the bank will not be aware of the action and so it may be possible to have the petition withdrawn – if agreement can be reached with the creditor.
What Options Exist if the Business Bank Account is Frozen?
There are occasions when the business has hit a temporary problem and the directors want to find an alternative to compulsory liquidation and to regain access to their frozen business bank account.
One route is through a Validation Order: a court order which unfreezes bank accounts via the courts. Of course these depend on credible evidence if they’re to be made.
Can a Validation Order be used for a Frozen Bank Account?
This is an area where advice should be taken since a validation order will involve cost and there are no guarantees it will be granted. A government form known as IAA needs to be completed and a fee (currently £155) paid. However, there could be considerably more expense in legal fees as a barrister will be required to present the case.
The form is submitted along with a witness statement, which details the company’s financial position with assets and liabilities, a cash flow forecast and profit and loss projection for the time period for when the order is sought. The statement should also provide information on each payment which the company is seeking validation for. The court will be seeking to hear about ways in which creditors can be in a better position, rather than why the company owner wants to unblock their bank account.
A court would need to be convinced that there will be benefit for creditors and that business owners will not just be seeking the order to improve matters for themselves. Examples of how creditors could be helped could be if there is a suitably large payment due to the business and evidence of when this will be paid into the account is provided or if an asset can be sold quickly to realise sufficient funds to clear debts.
If the court agrees to grant a validation order, then the business owner will be given a copy of this and on providing it to the bank, will have the account unfrozen. If it is not granted,
then there may be the option to appeal. However, given that there are invariably time pressures during liquidation, this may be impractical.
Can a Company Voluntary Agreement be used for a Frozen Bank Account?
A further way forward could be in showing there is serious inten to set up a Company Voluntary Agreement (CVA). This is a legally binding agreement with creditors where a plan to repay them is established and will typically last for three to five years.
A licenced insolvency practitioner will work closely with directors to see if this vehicle could lead to recovery and can also assist with issues around bank account access. The court will need to hear arguments as to why a CVA is a workable solution with a focus on how it will allow debts to be settled.
A Frozen Bank Account Calls for Immediate Action
There are solutions to unfreeze a business bank account, but time is of the essence. Do not delay in seeking advice from a licenced insolvency practitioner as prompt and professional advice can mean the difference between business survival or failure.
If the bank account is frozen there is often a very short window in which to try and secure a recovery. Business owners must avoid putting their heads in the sand, even if the situation can appear overwhelming. Delaying taking action can simply result in higher losses and more complications. The liquidation process moves quickly and having the right guidance and a clear plan in place is the best way to deal with this challenging situation.
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