By: Money Navigator Research Team
Last Reviewed: 12/01/2026
FACT CHECKED
Quick Summary
If an HMRC-related restriction hits during administration or liquidation, the immediate effect is usually operational: the business can lose the ability to move money (or access “available” funds), Direct Debits and cards can fail, and inbound payments may be held or returned.
Insolvency doesn’t automatically “switch off” an HMRC enforcement route or a bank’s compliance controls – but it can change who is authorised to deal with the bank, what evidence is requested, and how money is handled as an insolvency asset.
The practical question is almost always: is it HMRC enforcement (legal/statutory route) or a bank compliance freeze (provider-led controls)? They can look identical from the outside, but they behave differently and unwind differently.
This article is educational and not financial advice.
Why this situation is uniquely disruptive in insolvency
In insolvency, timing and control matter. Once a formal insolvency process begins, the role of directors changes and an insolvency office-holder (administrator, liquidator, or supervisor) may take control of company assets and decisions under the framework of the Insolvency Act 1986 and supporting rules such as the Insolvency (England and Wales) Rules 2016.
A bank account restriction landing in the middle of that transition can create a practical “deadlock”:
the bank may only act on instructions from the recognised controller, and
the recognised controller may need the bank to release funds (or explain restrictions) to carry out statutory duties.
HMRC enforcement vs bank compliance freezes in an insolvency context
HMRC enforcement restriction (externally driven)
This usually means the bank is responding to an HMRC-linked statutory or legal mechanism. Commonly discussed examples include debt recovery routes such as HMRC’s direct recovery of debts guidance (DRD) and other enforcement pathways. In some enforcement contexts, court-based restrictions can be relevant under frameworks such as the Proceeds of Crime Act 2002.
In insolvency, the “shape” of disruption can be: funds ring-fenced, funds removed, or rails blocked while the enforcement process runs.
Bank compliance freeze (internally driven)
This is provider-led: the bank (or e-money firm) restricts the account while it completes checks linked to risk controls and duties such as those under the Money Laundering Regulations 2017. These freezes often involve requests for documents and explanations, and the provider may disclose limited detail during active financial crime controls.
If you want the clean comparison outside insolvency, see: HMRC enforcement vs bank compliance freezes: what’s the difference?
What typically happens step-by-step
1) Payment rails stop first (before anyone fully understands why)
In many cases, the first visible signs are:
Faster Payments out fail
cards decline
Direct Debits/standing orders fail
online banking permissions change or are removed
This is why “freeze” often feels like a cash-flow crisis even when a balance still appears on screen.
During insolvency, banks usually need clarity on:
who is now authorised to give instructions (administrator/liquidator)
what documentation evidences that authority
whether restrictions are driven by enforcement notices, provider controls, or both
This is where insolvency can change the conversation: the bank may be willing to re-engage once the office-holder’s authority is evidenced, but enforcement-led constraints can still limit what the bank is allowed to do.
3) Funds in transit and scheme processes start to dominate outcomes
Even if the account is “the” bank account, money can be tied up in:
card settlement pipelines
refunds/chargebacks windows
returned transfers and reconciliation cycles
That’s why some businesses see disruption that persists after the initial event appears “resolved”.
Summary Table
| Scenario | Outcome | Practical impact |
|---|---|---|
| HMRC enforcement restriction coincides with administration appointment | Bank must follow enforcement route; administrator must evidence authority | Payments can remain blocked even after control changes |
| Bank compliance freeze triggered during liquidation | Provider restricts rails while checks run | Liquidator may need to satisfy verification before funds move |
| Funds ring-fenced (available balance reduced) | Balance may show, but “available” is lower | Payroll/suppliers fail despite apparent funds |
| Court-based restriction in an enforcement context | Access constrained under legal process | Timeline follows legal steps, not business urgency |
| Card settlement payouts continue but can’t be received/used | Payouts held, delayed, or rerouted | “Sales happened, cash didn’t arrive” problem worsens |
| Freeze escalates to closure during insolvency | Account relationship ends | Inbound payments bounce; statements/history become critical |
What happens to Direct Debits, cards, refunds, and chargebacks?
Even in insolvency, payment schemes and consumer protections keep operating, which can create a mismatch between “business is insolvent” and “payments continue to flow”.
Direct Debits and standing orders: these often fail early once rails are restricted. See: Direct Debits and standing orders when a business account is frozen.
Card payments and settlement payouts: card acceptance can continue while settlement is delayed or blocked. See: What happens to card payments when a business account is frozen and Card settlement payouts when a business account is frozen.
Refunds and chargebacks: customers can still raise disputes and chargebacks, and those processes can interact awkwardly with insolvency. See: Card disputes in administration or liquidation: what happens? and Chargebacks when a business account is frozen.
Does insolvency stop HMRC from recovering money?
Insolvency does not automatically prevent HMRC from using lawful recovery routes, but it can change the practical environment: control of accounts, communications, and the treatment of funds as part of the insolvency estate.
It can also affect creditor priority and distribution rules, which sit within insolvency law and related guidance.
For a simple statement of what “administration” and “liquidation” are designed to do, the Insolvency Service guidance on administration and liquidation is a useful public reference point (navigate to the relevant administration/liquidation explainers).
If you’re trying to separate “HMRC can restrict” from “HMRC can remove funds”, these related explainers are the right pair:
Scenario Table
| Level | Example | What’s happening | Practical impact |
|---|---|---|---|
| Scenario-level | Administrator appointed while account is restricted | Control shifts from directors to office-holder | Bank may require formal proof before acting |
| Scenario-level | Liquidation begins with enforcement constraints present | Assets must be marshalled under insolvency rules | Payment rails can remain blocked despite insolvency status |
| Process-level | Authority verification + KYC refresh | Provider verifies office-holder mandate and identity | Delays if documentation is incomplete or inconsistent |
| Process-level | Scheme timelines (returns/chargebacks/settlement) | Payment schemes keep processing on their own clocks | “Stuck money” persists even after status changes |
| Outcome-level | Restriction lifted but funds remain held | Rails resume but settlement/holds remain | Cash flow can still be impaired |
| Outcome-level | Account closed; balance returned after clean-down | Relationship ends after internal processes | Inbound bounces; statements become key evidence |
Compare Business Bank Accounts
During restrictions and insolvency, the most important differences between providers are operational: which rails fail first, how statements and audit trails are accessed, and how quickly control changes (to an insolvency office-holder) can be processed. For a neutral starting point across providers, see our hub: Business Bank Accounts.
If the business needs to understand continuity options while one account is restricted, this scenario explainer is relevant: Can you open a new business bank account if one is frozen?
Frequently Asked Questions
No. Insolvency changes who controls the company and how assets are dealt with, but it does not automatically cancel an enforcement route or a provider’s compliance controls.
If the restriction is driven by a legal/statutory mechanism, it usually continues until that mechanism is varied, completed, or otherwise resolved through its own process.
In practice, insolvency can change the pace and pathway because an administrator or liquidator can provide formal authority and structured evidence. But the existence of insolvency alone is not a “reset switch” for restrictions.
Control depends on the insolvency process. In administration and liquidation, an office-holder’s authority is grounded in insolvency law, including the Insolvency Act 1986 and relevant rules such as the Insolvency (England and Wales) Rules 2016.
Banks usually require documentary proof of appointment before they will change mandates or accept instructions.
A common friction point is timing: directors may still have app access while the bank’s back office has not yet updated authority, or vice versa. That mismatch can look like “the bank is refusing” when it is actually a permissions and verification issue.
Sometimes, but it depends on what is causing the restriction. If it’s a bank compliance freeze, providers may require verification and supporting information before releasing funds or restoring rails. If it’s enforcement-led, the bank may be constrained by the enforcement route even when the office-holder is recognised.
Operationally, the office-holder may still need to manage settlement holds, refunds, and inbound returns that sit outside a simple “release the balance” instruction. That’s why an account can be “under control” but still not practically usable.
When rails are restricted or funds are ring-fenced, payroll and essential payments are often among the first casualties, because they rely on outbound transfers or Direct Debits that stop working. Even if the business intends to keep trading in administration, operational capability can be lost quickly.
In practice, insolvency does not pause supplier expectations or statutory deadlines, and missed payments can create secondary damage (contract terminations, service cut-offs, penalties).
The failure mechanics are similar to any freeze event, which is why this is relevant: Direct Debits and standing orders when a business account is frozen.
Yes. Ring-fencing often presents as “available funds reduced” rather than “everything stopped”, although the practical impact can still be severe. HMRC’s description of DRD and its safeguards is in its direct recovery of debts guidance.
In insolvency, ring-fencing can be especially confusing because statements may show money that cannot be used for insolvency costs or critical payments. For the DRD mechanism explained end-to-end, see: What is HMRC Direct Recovery of Debts (DRD)?
Refund and chargeback processes can continue because card schemes and issuers operate independently of the business’s insolvency status. If the merchant can’t process refunds due to restricted rails, chargebacks may increase, and those disputes can interact with payout holds and reserves.
In other words, insolvency does not necessarily stop disputes; it can increase them. The operational pathways are broken down here: Card disputes in administration or liquidation: what happens? and Chargebacks when a business account is frozen
Sometimes, but it depends on whether there is any functioning route to receive and make payments. Some businesses can continue trading if they have alternative rails (for example, another account or arrangements that allow settlements), while others cannot operate without the frozen account.
The key point is that “trading” includes more than taking sales: it includes paying suppliers, staff, and handling refunds. This is discussed in: Can a business still trade if a bank account is frozen?
There is no single timeline. Enforcement-led routes move on statutory/legal process timelines; bank compliance freezes move on verification timelines; and scheme processes (returns, settlement, chargebacks) have their own clocks. Insolvency can add further sequencing steps around control, disclosures, and asset handling.
For a practical discussion of why restrictions can persist (and why they sometimes lift in stages), see: How long can HMRC restrict a business bank account?
A freeze or enforcement restriction is not the same thing as a bank failing. Deposit protection is a separate topic that depends on whether the firm is an authorised bank/building society and whether the deposits are eligible under FSCS rules. FSCS explains the framework in its banks and building societies protection guidance.
For the business-account-specific angle (including nuances around provider type), see: Is money in a business bank account protected by the FSCS?
No. Insolvency often coincides with unusual transaction patterns, urgent fund movements, and incomplete documentation – all of which can trigger provider compliance controls under frameworks such as the Money Laundering Regulations 2017. That can produce a bank freeze that looks like an “HMRC freeze” even when HMRC is not the driver.
If you’re trying to distinguish the two without guesswork, this comparator is the best starting point: HMRC enforcement vs bank compliance freezes: what’s the difference?
The hidden mechanism is that insolvency doesn’t just change “financial health” – it changes authority and process.
Restrictions become harder because three systems overlap:
- (1) insolvency control shifting to an office-holder
- (2) enforcement or compliance controls limiting account movement, and
- (3) payment schemes continuing to process disputes, returns and settlement on their own timelines.
That overlap is why outcomes often feel inconsistent: a balance can be visible but unusable; sales can be taken but payouts don’t land; and even after an office-holder is appointed, restrictions can persist until the bank’s verification and the enforcement/compliance pathway both reach a clear end state.
Sources & References
The statutory framework: Insolvency Act 1986
The procedural rules: Insolvency (England and Wales) Rules 2016
HMRC debt recovery overview: direct recovery of debts guidance
HMRC support context: difficulties paying HMRC
Enforcement framework context: Proceeds of Crime Act 2002
AML framework context: Money Laundering Regulations 2017
Public insolvency information: Insolvency Service