One of the best tools a creditor has when looking to wind up your company due to non-payment of debts is the ability to freeze your bank accounts. This will quite literally put your company out of business due to the inability to pay staff, order supplies or carry on business as usual. Although you should immediately cease trading when your company is insolvent, it may be your opinion that your business is indeed viable. It is important for company directors to realise how greatly a winding up petition can affect the company and everyone involved by freezing the accounts needed to continue operating.
Winding up Petitions: How and When a Bank Account Is Frozen
Typically a bank account is frozen when the winding up petition (WUP) is advertised in the Gazette. This makes sense in that until that time, the bank may be unaware that there is a possibility that the company is trading insolvent. Even though that company should have ceased trading immediately when unable to pay its debts, this is not often the case. Once the debtor’s bank is aware of the petition it will immediately freeze all accounts.
Why Banks Freeze Accounts of Companies during Winding up Petitions
One of the reasons banks freeze bank accounts during insolvency proceedings is because that is the law. However, most bankers are not so altruistic. The bottom line is that the bank does not want to be held responsible for any debts accrued during that time. Since an insolvent company is legally obligated to cease all financial transactions, a bank could (and often is!) held responsible for any of the insolvent company’s debts during that time.
These rules are covered in The Insolvency Act 1986 under section 127(1). Any alteration of a company’s worth including the sale of property or sale of assets is to be considered void. This leaves a bank figuratively holding the bag.
What a Frozen Bank Account Means to Your Company
Not only will you not be able to purchase supplies or pay employees, there are even greater problems to be overcome. How will you pay legal counsel to represent you in fighting a WUP? You will be responsible for court fees, legal representation and payment of outstanding debt owed to the creditor or creditors that petitioned to have you wound up. Remember, you cannot legally sell any assets to come up with the money to pay for representation so you would be on your own.
What Can Be Done to Have Your Accounts Unfrozen
There are several alternatives which may be possible including a Company Voluntary Arrangement with your creditors to pay them off in instalments over time. However, at this point your creditors may be reluctant to deal with you and may insist on going forward with the petition. The safest route may be obtaining a Validation Order from the court which could give you at least limited use of your funds until the winding up hearing. Here again, this will cost money which you may not have access to.
Some directors have been forced to sell personal assets to cover the cost of disputing the petition or negotiating instalments during this time. If you are faced with a winding up petition and fear that your bank account may be frozen, call the insolvency specialists at Real Business Rescue without delay. It is our goal to help you stay out of court and in business. We may be able to help you reach an acceptable alternative with your creditors BEFORE the petition is advertised in the Gazette. Call us on 0800 644 6080 for a free consultation.