My Company Bank Account is Frozen: What Can We Do?

If your company’s bank account has been frozen, you’ll face immediate challenges that require swift, effective action. The reasons for a frozen account can range from regulatory compliance issues to tax irregularities or even suspicion of fraud.

The impact is not just monetary; it can threaten your business continuity, affecting everything from employee salaries to supplier payments. As a director, you’ll need to take control of the situation by understanding the legal framework and initiating a multi-step plan to resolve the issue. Our guide aims to provide you with a focused course of action.

What Is a Frozen Bank Account?

A frozen bank account is one where all financial activities are temporarily halted, rendering you unable to access your funds, make payments, or execute any transactions. In the UK, accounts can be frozen by either the bank itself or through a court order. The freeze can apply to all types of accounts, including current accounts, savings accounts, and even investment accounts.

The freezing of a bank account generally occurs due to suspected unlawful activities such as fraud, money laundering, or tax evasion. However, it may also be the result of administrative issues, such as discrepancies in account details or regulatory compliance checks. It’s worth noting that banks are required by law to act in accordance with the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2017, which means they have a legal obligation to report any suspicious activities and may freeze accounts pending further investigation.

As a director, understanding the reason behind the freeze is crucial for determining your next steps. If the freeze has been initiated by the bank, they are usually obligated to notify you, although they may not always be able to disclose the specific reason due to legal constraints. If the account has been frozen via a court order, you should be served with legal documents outlining the reason and duration of the freeze.

The consequences of having a frozen bank account are immediate and can be severe. Not only do you lose access to your funds, but ongoing transactions such as direct debits or scheduled payments will also be affected, potentially leading to penalties or service interruptions. Therefore, immediate action is required.

Reasons Why Banks Can Freeze Your Account

A bank account can be frozen for something as simple as having insufficient funds in the account. However, it is usually more serious than that.

The following reasons may cause a frozen account :

1. The business is the subject of a winding-up petition, which can result in the bank freezing the account to avoid potential responsibility for debts accrued during insolvency. The winding up petition is the most serious method a creditor (often HMRC) can take to get the money they’re owed.
2. A ‘freezing order’ has been made against your business by a UK court to protect assets in dispute. A freezing order is a legal injunction that prevents a person or company from disposing of or dealing with assets or funds, usually in the context of a civil or criminal proceeding. It is designed to prevent the dissipation of assets.
3. To protect your account from unauthorised access or fraudulent activity, the bank’s fraud department will usually contact you to explain the situation and guide you through restoring access.
4. The bank has detected a potentially suspicious transaction, such as money laundering or terrorist financing, and has reported it to the  National Crime Agency (“NCA”) by filing a Suspicious Activity Report (“SAR”), which has 38 days to investigate. The bank may not disclose this to the business to avoid committing the criminal offence of tipping them off.

Freezing of Bank Account in a Winding-up Petition

One tool at a creditor’s disposal if they are unable to recover a debt worth more than £750 is to issue a winding-up petition against your company. The purpose of a WUP is to force a company into compulsory liquidation, after which it will be closed down and struck off the register at Companies House.

When the Gazette publishes the winding-up petition, the banks will immediately freeze your bank account.

It may be possible to enter into negotiations with creditors to settle the debts, but these negotiations will need to take place through an insolvency practitioner. That raises the question, how will you pay the insolvency practitioner’s fees?

Of course, if the business is unable to repay the debts, it should have already ceased trading. Continuing to trade with no reasonable prospect of paying creditors can leave you open to accusations of wrongful trading . You can be made personally liable for a proportion of the company’s debts as a result.

As you can see, it’s a complex situation for which swift decisions and expert advice should prevail.

What are Bank’s or Creditor’s Legal Rights to Freeze a Company Bank Account?

Under UK law, banks and creditors have certain legal rights to freeze a company bank account in certain circumstances. The relevant laws include:

1. Section 127, The Insolvency Act 1986^[1]Trusted Source – Legislation- Section 127, The Insolvency Act 1986 – If a winding-up petition is presented against a company, the bank may freeze the company’s bank account to avoid any potential responsibility for debts accrued during the insolvency.
2. Part 7, The Proceeds of Crime Act 2002 (POCA)^[2]Trusted Source – Legislation- Part 7, The Proceeds of Crime Act 2002 – This legislation requires banks to monitor their customers’ bank accounts for suspicious activity, including money laundering and terrorist financing. Banks must report any suspicious activity to the National Crime Agency (NCA) and freeze the account during the investigation.
3. Part 72, The Civil Procedure Rules^[3]Trusted Source – Legislation- Part 72, The Civil Procedure Rules – Creditors may obtain a court order to freeze a company bank account if the company fails to pay a debt, for example, by securing a third-party debt order against the company.
4. Part 7, The Financial Services and Markets Act 2000 (FSMA)^[4]Trusted Source – Legislation- Part 7, The Financial Services and Markets Act 2000 – Banks are legally obligated to prevent financial crimes, including fraud. If a bank suspects that a company bank account is being used for fraudulent activities, it may freeze it to prevent further damage.

What are the Consequences of a Frozen Bank Account?

For limited companies, a frozen bank account can have severe consequences that can exacerbate financial difficulties and even tip the company into insolvency.

If the account is frozen due to unpaid debts or a winding-up petition, any chance you have to pay the debt will be hampered by an inability to use your account.

In addition, a frozen bank account can disrupt operations and damage relationships with suppliers and customers. The inability to access funds can lead to missed or delayed payments, which can harm the company’s credit rating and make it harder to obtain credit in the future.

What Can You Do to Unfreeze Your Bank Account?

It might be the case that you could pay the creditor if given more time, but in many cases, this is additional time a creditor is not willing to give. But, if you believe the company is still viable, you do have some options:

• Pay off the winding up petition (potentially using personal funds)
• Apply for a Validation Order to Unfreeze the Account
• Negotiate a Company Voluntary Arrangement
• Voluntarily liquidate the company via a CVL

(1) Pay off the Winding up Petition

One viable solution is to pay off the winding-up petition, potentially using personal funds. However, this decision should be made with careful consideration of the director’s personal financial risk and the overall viability of the business. It’s crucial to assess whether this step would lead to a sustainable financial turnaround for the company. If the underlying issues causing financial distress are not addressed, using personal funds might only offer a temporary reprieve.

(2) Apply for a Validation Order to Ask the Court to Unfreeze the Account

To apply for a validation order you will need to complete Form 7.1A and write a witness statement that you must take to court with you.

You will also need to tell the creditor who issued the winding up petition that you’re applying for an order, and let them know what court you’re applying to. An insolvency practitioner can help you prepare this documentation.

To accept the order, the court will need to be satisfied that the company is solvent and able to pay its debts. Alternatively, the court may consider a validation order from an insolvent company if it will be beneficial to the company’s creditors.

If accepted by the court, the order will allow certain transactions to pass through your company’s bank account. This could include a transaction to sell a key asset to free up the money the company needs.

(3) Propose a Company Voluntary Arrangement (CVA)

Negotiating a company voluntary arrangement (CVA) with your creditors could represent a better option than a validation order. However, the fact that your company bank account has been frozen in the first place is likely to be a sign that your relationship with your creditors has broken down. That could make the negotiations process extremely difficult.

If an insolvency practitioner believes your company is viable, they can propose a CVA to your creditors.

This will need to be accepted by 75 percent of the creditors. If agreed, all legal action against your business will be ceased, the company account will be unfrozen and you will be able to continue to trade.

To maintain the CVA, you will have to make a single monthly payment for a period of up to five years. Failure to do so will lead to the reinstatement of the legal action.

(4) Place the Company into Voluntary Liquidation

Ultimately, you might decide that enough is enough, the company is no longer viable, and you do not want to leave yourself open to allegations of improper conduct as a company director. In this case, the best option would be to enter into voluntary liquidation.

The company will be closed, and its assets will be sold for the benefit of the company’s creditors. Any money remaining from the liquidation will go to the shareholders.

This option also reduces the likelihood of serious allegations being made against you, thereby protecting your personal assets and allowing you to act a company director in the future.

FAQs

References

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.

1. Trusted Source – Legislation- Section 127, The Insolvency Act 1986
2. Trusted Source – Legislation- Part 7, The Proceeds of Crime Act 2002
3. Trusted Source – Legislation- Part 72, The Civil Procedure Rules
4. Trusted Source – Legislation- Part 7, The Financial Services and Markets Act 2000