Controlling the company bank account
- Alex Kleanthous
- Updated: Mon, 13th Mar 2017
It is not uncommon for a company director to abuse the company bank account. Common offences directors commit include using the company bank account for personal expenses and lump sum withdrawals. The list is fairly limitless. Here, we assess how abuse can be halted by freezing a company bank account.
Freezing bank accounts – common problem situations
When a director or shareholder dispute erupts, we look to see who controls the bank account. Reason being, there can and often is abuse. Directors owe fiduciary duties to the company and its shareholders. Often freezing bank accounts is a more effective way to resolve litigation disputes than claiming for breach of a director’s fiduciary duty.
Unauthorised payments to directors
From a legal perspective, an unauthorised payment from a company bank account to a director is usually either:
- Fraud – the director in question may be submitting false expenses claims and or using the company bank account as a private fund.
- A loan from the company to the director – in which case, unless there is a definitive repayment date, it is repayable on demand. There are compliance aspects to this under the Companies Act 2006. Usually, a loan to a director has to be approved by the shareholders. There are exceptions.
- An unauthorised dividend payment – if dividends have not been voted and paid in accordance with the company’s articles and or shareholders’ agreement the dividend received by a director shareholder is unauthorised. The shareholders may have been unfairly prejudiced, giving rise to a shareholder claim against the directors in default.
Whilst the position is investigated, a quick way to bring a fast stop to unauthorised payments to directors is to freeze the company bank account. The director in question has nearly always breached fiduciary duties owed to the company.
Freezing a company bank account
The first step is to consider approaching the bank. But, sometimes the bank will not act unless the directors on the bank mandate consent.
And, often the abuse is by a director on the mandate meaning consent is not obtained. If the bank do not co-operate the next step is to consider an injunction.
Injunction to freeze a bank account
As a result of the defaulting director’s actions, duties have been breached. This gives rise to a claim by a shareholder against the director. But, claims against directors take time to reach court. Immediate protection is often needed to prevent further abuse of a director’s fiduciary duties. This is when we get the injunction in place pending full trial.
Freezing bank account injunctions can cover many risks
The freezing bank account injunction application can:
- Prevent payments out of the company bank account unless authorised by all of the directors.
- Prevent payments out of the company bank account unless authorised by the court.
- Prevent company bank account payments and
- Permit payments into the company bank account so that the trade continues.
- Permit essential payments such as tax, employees, and legitimate suppliers.
Our approach will depend upon the severity. The injunction, once obtained, is sent to the bank. The bank will then react.
Freezing bank account evidential requirements
To obtain a freezing bank account injunction, strong evidence will be required. Evidence includes:
- A witness statement given by the claimant giving details of the company bank account abuse.
- Bank payments that are unauthorised.
- Evidence of attempts to stop the abuse.
Benefits of an undertaking from the offending director
As an alternative to a court injunction, we can seek to obtain an undertaking from the director. An undertaking has the same weight as an injunction. This means that if the undertaking is breached the director faces imprisonment. Undertakings do require consent.
If consent is refused this can be used as evidence for the application for a bank account freezing injunction.
Practical aspects of freezing a bank account
There are practicalities to consider when it is suspected that the company bank account is being misused for the director’s personal benefit. We work through the deliberations with you.
- What will the director argue – anticipating likely defences the director is likely to rely upon is a big part of the strategy for companies and shareholders. Sometimes the case is stronger if witness evidence has been obtained discretely in the background.
- Board minutes – can they be used to support the case.
- Payments and receipts – does the freeze have to include payments in to the company bank account? Yes, in cases of fraud or money laundering where the minority shareholders have no control. It is worth checking the company articles and or shareholders’ agreement to see if the shareholders have any powers of veto.
- Notice – when making the injunction application, do we give notice to the director? Often, no. This is on the basis that the application is urgent and there are ongoing and imminent threats.
Downside to not giving notice is the director may argue that had notice been given, the director would have ceased the offending behaviour.
Alex Kleanthous is a partner in the litigation disputes team. Alex acts for shareholders, directors, and companies. Alex knows the pressure points.