My business bank account has been frozen – what can I do?

Understanding how a validation order could unfreeze your company's bank account

While many company directors will be aware of the severity of being issued with a winding up petition (WUP), what takes some by surprise is coming into work to find that their bank accounts have been frozen. This action is a standard part of the winding up petition process with banks typically freezing accounts once the WUP has been advertised in the Gazette in order to shield creditors against further financial losses.

Without an active bank account, you will find that your ability to continue doing business will grind to a halt almost immediately. Although it is true that all trading should cease once a company becomes knowingly insolvent, there are times when a creditor may issue a WUP believing your company to be insolvent when it is in fact not.

Failure to respond to the WUP will see your business bank accounts remain frozen and ultimately your company will be forcibly closed as it enters a process of compulsory liquidation.

What is a Winding Up Petition (WUP)?

A Winding Up Petition is a legal action undertaken by creditors to recover money a company owes but is failing to repay. It serves as a formal notice that the creditor intends to force the company into compulsory liquidation should payment not be made.

If your company has been issued with a WUP, you have seven days during which to stop the petition by either paying the amount you owe, coming to a mutually-agreeable payment plan with the petitioning creditor, entering into a voluntary insolvency process, or formally disputing the WUP.

If you fail to take any action at all, the courts will issue a Winding Up Order and the compulsory liquidation of your company will begin. Once the winding up order has been made the company will be shut down and removed from the Companies House register.

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Why would a winding up petition freeze my bank account?

After a winding up petition has been served, notice of this will be advertised in the Gazette. It is at this stage where banks will typically take the step of freezing any accounts relating to the company with immediate effect. Banks do this to shield themselves against any further losses which could be incurred by the company if access to its bank accounts were left unrestricted.

Once a WUP has been issued, the disposal of any assets (including the withdrawal of funds from company bank accounts) will be seen as void unless the court deems otherwise. This effectively means that if a company which is subject to a WUP extracts funds from its bank account, the transaction may later be annulled and the bank will become liable for this money. To prevent this from happening, bank accounts are frozen which stops directors accessing any remaining funds or from authorising further transactions.

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How will a frozen bank account affect my ability to trade?

Without a functioning bank account from which to pay staff and suppliers, or to otherwise send and receive money, it is almost impossible for a company to continue doing business. This leaves no other option but for the company to cease trading immediately.

Whilst it is important that an insolvent company stops trading in order to protect the interests of its creditors, in some cases a WUP may be issued against a company which has a viable future and is merely experiencing temporary financial constraints. In this instance the company has a legitimate reason for fighting the petition to prevent the business from being forcibly closed.

Unfortunately a frozen bank account makes it extremely difficult to challenge a WUP as company funds are effectively out of bounds. It may be possible to unfreeze your business bank account by way of a validation order, although this is a costly process in itself and does require court intervention.

What is a validation order and how can this help unfreeze my bank account?

As the name suggests, a validation order essentially makes any transaction conducted after the WUP has been advertised ‘valid’, meaning that the bank will not be held responsible for any financial losses incurred. It must be noted at this stage that a validation order will only be granted in exceptional circumstances.

Often one is only sought if a Company Voluntary Arrangement (CVA) is in the process of being drawn up or if proof can be provided which shows the company is solvent. You will need the input of a legal professional who will address the court and present your case on your behalf; this comes with significant costs attached and is not a step many companies will be able to justify taking.

How can I apply for a validation order?

Applying for a Validation Order can is not always a straightforward process as it does require legal input. Certain information will be required by the court, but this can vary from one case to the next. However, most often the application will ask for:

   1.   The name of the company along with the trading and registered address
   2.   A brief but detailed background on the circumstances leading up to the WUP being presented
   3.   The state of the company’s paid up and nominal capital
   4.   When the directors were made aware of the WUP
   5.   Complete details as to the company’s financial status in terms of assets and liabilities
   6.   Whether the WUP is being disputed
   7.   Forecast for the financial future of the company including a cash flow prediction
   8.   Any other information as requested by the court

This is by no means a complete list but it gives a broad idea of just what is required when making an application for a Validation Order to unfreeze business bank accounts. 

It must be said here that Validation Orders are only awarded to companies who can provide a compelling reason why one should be granted. If your company is clearly insolvent and with very little possibility of a turnaround being achieved it is highly unlikely that a Validation Order will be approved. If this is the case you may have to consider the very real possibility of your company being forced into liquidation. Due to this it is vital you seek expert help and advice upon a WUP being issued against your company.

What should I do if my company is insolvent?

If your company is experiencing acute distress, and the WUP is a direct result of your financial problems escalating, it is vital that you address the underlying reasons behind your current situation. Although having your company’s bank account frozen may seem like a disastrous position to be in, it may actually end up being a blessing in disguise at least from a personal liability point of view.

If your company is insolvent then you have an obligation as its director to cease trading and protect the interest of your creditors. By continuing to trade you run the risk of either accruing more debt or of disposing of company funds or assets, thereby worsening the position of existing creditors. This is known as wrongful trading and is a civil offence under the Insolvency Act 1986. If you are found guilty of wrongful trading, you could be held personally liable for any debts the company ran up while knowingly insolvent. In extreme cases you could also be disqualified from acting a company director in the future.

However, if your business’s bank account is frozen, this prevents you from conducting further transactions which may later be deemed wrongful, thereby protecting your personal position should the company be liquidated at a later date.

Seek expert advice

When your company’s problems have got to the stage where its bank accounts have been frozen or a winding up petition has been issued, you need to make it a priority to contact a licensed insolvency practitioner to assist with your current position. Time is very much of the essence in these types of situations.

A licensed insolvency practitioner will be able to talk you through your current position and help you understand the options open to you and your company. They will assess the viability of seeking a validation order to allow you access to your bank accounts as well as determining the likelihood of successfully turning around your business.

Alternatively, closure options may be discussed if your company is found to be insolvent. This will give you the chance to liquidate your company on a voluntary basis rather than having this forced upon you by creditors. Call our expert team today for immediate help or to arrange a free no-obligation consultation.