Court does not validate payments made from frozen bank account

United Kingdom

A recent case reminds banks that it is necessary to have robust systems in place for quickly identifying advertisements of winding-up petitions against their customers. This is because by law, any dispositions of property made by the company (such as payments from its bank account) after the filing of the petition are void unless permitted by the Court. A liquidator can reclaim money paid away.

In this case, the bank had frozen the account of its customer upon seeing notice of a winding up petition in the London Gazette. However, payments were made from the account after the petition was filed but before it was frozen to protect the bank from further possible liability to a liquidator.

The Court refused to validate payments made. The Court decided that if the company later goes into liquidation, the liquidator may be entitled to claw back the payments made out of the account after the petition was filed. It said, "the question of validation … is something the liquidator would wish to consider".

This could be bad news for the bank as it is not clear from the judgment what the bank could have done to minimise its potential loss. The liquidator could require the bank to pay to the estate the total of sums paid out of the account. Liability runs from the date of presentation of the petition but the first chance the bank has to take steps to freeze the account is upon sight of the advertisements (unless the customer tells the bank beforehand, or the bank learns by some other informal means). It is crucial therefore that the bank can get a message from the department checking for advertisements of petitions to the account-holding branch as quickly as possible to prevent loss to the bank.

What is also interesting about this case is that the Court was prepared to validate future payments. A Court will only validate such payments if it is satisfied that the disposition will not reduce assets available for distribution to creditors if the company is wound up. In the case in question, the Court decided that there would be no harm to the trade creditors of the company by allowing the future payments to be made. In fact, it noted there would even be a small profit made as a result of allowing the payments to be made.

Further reading: Sapphire Technology Ltd v Square 3 Ltd, CHANCERY DIVISION, [2006] EWHC 2038 (Ch)