The document discusses banks freezing company accounts when undergoing restructuring such as a Company Voluntary Arrangement (CVA). It recommends companies communicate with their bank in advance to avoid account freezing during the CVA proposal period. Inexperienced banks may freeze accounts due to lack of understanding of CVA processes and fear of fraud. Early engagement allows banks to be reassured and avoid knee-jerk reactions that harm the company's ability to trade during restructuring.

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Published on 14 December 2010 by Tony Groom
Dealing with the Bank When Considering a Company Voluntary
Arrangement
The large number of companies in financial difficulties is swamping the banks and as
a result there is a lack of experience in banks when dealing with companies in the
process of restructuring.
If a company is subject to a Winding-up Petition (WUP) the bank can be held liable
for any funds that are paid out of its bank account once the Petition has been
advertised in the London Gazette. As a result banks tend to freeze the accounts of
any company with an outstanding WUP as soon as they become aware of it. The
only way for a company to free up money in a frozen account is via an application
to Court for a Validation Order.
When attempting to save a company where there is no WUP, however, the lack of
experience among banks means that in some instances they are behaving as if
there were a WUP and this is getting in the way of attempts to restructure.
Rescue advisers are finding that once banks have become aware of an attempt to
restructure they are now sometimes freezing a company’s account, thus further
damaging its ability to trade. This is because banks do not understand the distinction
between the various restructuring tools.
An example of where this is happening is when a Company Voluntary Arrangement
(CVA) is being proposed. The process of agreeing a CVA involves notifying creditors
of the intention and allowing time for a meeting to be set up for creditors to approve
the CVA proposals. Usually there is a hiatus period of at least three weeks between
notification and the meeting, which allows creditors to consider the proposals and
make any comments or request adjustments before the meeting.
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2. However, banks’ inexperience of CVAs is leading some of them to freeze company
accounts during the hiatus period and this has an adverse effect in that the
company is no longer able to trade. While banks generally do not have the right to
freeze their clients’ bank accounts unless there is either a WUP, an order by the Court
or a breach of contract, they may take precautionary action out of fear when they
don’t know what is going on. Concern about fraud can always be used to justify
such an action. In such instances freezing an account would seem sensible
irrespective of any legal or contractual rights of the client.
In practise it makes sense for a company to talk to its bank beforehand to let them
know what’s going on. Where the company is overdrawn clearly the bank is a
creditor and should be notified of any restructuring proposals, in particular where
there is a CVA.
Where the company is in credit there is no statutory obligation on the company to
notify its bank, however, there may be a contractual requirement, but whether or
not there is an obligation, it makes sense to advise the bank to reassure them
beforehand so as to avoid a ‘knee jerk’ reaction that might result in the account
being frozen.
Some may question whether the banks can be trusted not to freeze an account if a
company notifies them while it is in credit and assume that they cannot be trusted
not to freeze an account in credit following such notification. However, when a
company does not tell its bank, then the bank has grounds for believing that it has
lost the confidence of the directors of their client company and trust between them
is now an issue. Such trust issues get in the way of a relationship which is why business
rescue advisers advocate always speaking to the bank before the bank finds out via
other means.
In the current climate, the workload on the banks Insolvency Departments is heavy
and this can mean a significant delay in resolving the situation when a bank does
freeze an account. Far better to avoid the situation in the first place by engaging
with the bank early in the rescue process.
We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth.
Our team has worked for over 20 years to help stabilise and return hundreds of businesses to
profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors
and use your company’s assets to pay themselves. We work for you, not creditors.
More Free Resources for Directors and Business Owners in Difficulty
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Call Tony Groom on 0844 8040 540

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K2 Business Rescue
The Emergency Service for Business
Call Tony Groom on 0844 8040 540