When banking authorities are disputed: what every business should know

Why banks are rarely able to resolve internal business disputes and what businesses can do to protect themselves.

Picture this: two directors have a disagreement, and by the next morning nobody can move money in or out of the company’s business account.

When relationships break down within a business, one of the first calls is often to the bank. Directors, shareholders, trustees, partners, and business owners may assume the bank can step in, stop transactions, or follow instructions from one side of the dispute.

However, it is not that simple.

In reality, banks are not responsible for resolving internal business disagreements. Their role is limited to acting on the account mandates, authorities, and information available to them. If there is uncertainty about who has the authority to give instructions, the bank's ability to act may be limited. Rather than deciding who is right, a bank will often keep existing arrangements in place until the dispute is resolved or authority is clearly established.

This can have significant consequences. Businesses may find account access restricted, cash flow disrupted, or critical banking arrangements delayed at the very time certainty and decisive action are needed.

The limits of the bank's role
Many businesses assume that if they provide evidence of a dispute, the bank will immediately intervene. However, banks must act within their legal obligations and the authority granted to them.

Under the New Zealand Code of Banking Practice, banks are expected to treat customers fairly and reasonably. However, where authority is disputed or unclear, a bank must also ensure it is acting on properly authorised instructions. If it cannot determine who is authorised to act, it may be unwilling or unable to take action until the position is clarified.

From the bank's perspective, acting on instructions from the wrong person can expose it to claims from other stakeholders. As a result, banks often take a cautious approach when authority is disputed. In many cases, the safest option is to leave things as they are until the dispute is resolved or clear authority is confirmed.

When competing instructions arise
Problems often arise when multiple people who appear to have authority ask the bank to do different things.

For example:

• Two directors disagree about how company funds should be used.
• Business partners each ask the bank to take different actions.
• Trustees provide inconsistent directions regarding an account.
• A shareholder dispute spills over into banking arrangements.

In these situations, the bank is rarely in a position to investigate the facts or decide whose version of events is correct. Instead, it will usually look at the account mandate, governance documents, and records of authority it holds.

If authority remains unclear, the bank may refuse to act until the dispute is resolved. Resolution may occur through agreement between the parties, clarification of authority, a court order, or another formal process. In some cases, legal advice will be needed to determine the appropriate next steps.

Governance Problems at the Centre
Many banking disputes are in fact governance disputes.

Changes in directors, shareholders, trustees, ownership structures, or management are not always reflected in banking records. When a dispute arises, those gaps can create uncertainty at exactly the wrong time.

Outdated constitutions, incomplete records, poorly documented delegations of authority, and inadequate shareholder or partnership agreements can all contribute to the problem. Often, the issue is not the bank itself. The real issue is uncertainty within the organisation about who has authority to make decisions and how that authority is exercised.

In many cases, the bank's response simply exposes governance weaknesses that were already there. A dispute may be the first time anyone discovers that account mandates, governance documents, and day-to-day decision-making practices do not align.

Regular reviews of governance arrangements and banking authorities can help reduce these risks.

Reducing the Risk of Disruption
The best time to prepare for a dispute is before one arises. Businesses can reduce the risk of disruption by:

• Reviewing account mandates and signatory authorities regularly.
• Ensuring governance documents are current and consistent.
• Clearly documenting delegations of authority.
• Keeping accurate records of appointments and removals of key decision-makers.
• Reviewing shareholder agreements, trust deeds, constitutions, and partnership agreements to. ensure dispute resolution processes are clear.
• Obtaining legal advice when significant structural changes occur.

These steps can reduce uncertainty and make it less likely that a dispute will disrupt business operations.

Conclusion
Don’t expect a bank to resolve your governance or shareholders’ dispute.

Clear governance structures, accurate records, and up-to-date banking authorities can help ensure critical financial operations continue even when relationships become strained. Addressing these issues early is usually far easier, and far less expensive, than trying to resolve them in the middle of a dispute.

If your business is experiencing uncertainty around authority, governance, or banking arrangements, seeking legal advice early can help protect both business continuity and commercial relationships. Review your account mandates and governance documents before a dispute puts them to the test.

Get in touch with our experienced corporate and commercial team for tailored support.