Simon Read: Is PayPal right to freeze customers' accounts?

E-money pioneer PayPal has been accused of heavy-handedness and "unfair commercial practices" by fed-up Independent readers. In one alarming case earlier this month, a reader was forced to take the eBay-owned company to court to claw back almost £2,000 of her cash the company had withheld from her for six months.

Shelley Michaels, a 25-year-old trainee lawyer from Bedfordshire, had been a regular eBay seller when, earlier this year she sold £1,814-worth of goods through the online auction site. Because it was a higher than normal transaction, it flagged an alert at PayPal as a possible high-risk transaction. The company's standard response is to freeze the cash pending an investigation.

This makes perfect sense and is an important tool in combatting fraud. But under PayPal's terms and conditions, they can keep cash for 180 days. That's obviously so that they can investigate any suspicious activity, but you'd expect that once provided with evidence that all is above board, they would release money.

That's not what happened in Shelley's case. "I provided them with receipts for the computer tablets and games consoles I sold as well as tracking information to prove that the buyers had received the items," she says. "I also actually had positive feedback on eBay from the buyers."

But despite her calling PayPal 12 times, they refused to hand back her cash. "They had all the evidence to show that my account wasn't suspicious but they went ahead and closed it and kept my money."

With the cash being crucial to her, and the expectation that she would see none of it before 180 days had passed, Shelley decided to take legal action against PayPal. "My contention is that they unlawfully withheld the money and reading around the subject led me to believe they have often been guilty of doing this."

She brought a county court claim against PayPal and won her case in Milton Keynes earlier this month. "The judge decided PayPal had provided no good reason for withholding my funds and awarded me statutory interest and costs," she says.

At our request, PayPal responded to Shelley's case. "The judgment reflected how we had handled the customer's complaint, rather than our procedures and policies," it says. "The judge decided we had given ambiguous information to Ms Michaels about whether we would restore her account, and decided in her favour as a result. The decision did not concern PayPal's user agreement or our ability to apply limitations to customers' accounts as part of our risk controls."

But Shelley believes her case is far from unusual and wants to warn others of the practice. She also hopes to persuade PayPal to rethink its actions. "The company continues to arbitrarily freeze accounts and withhold customers' funds for up to 180 days. The extremely unfair practice could adversely affect thousands if not millions of PayPal customers.

"My concern is that PayPal's practice of arbitrarily freezing accounts could cause a business to fail or an innocent person to suffer financial hardship, particularly in the current tough ecnomic climate." But the company denies her claims. "We do not arbitrarily freeze accounts – instead, we may apply restrictions for a large number of reasons, including the need to protect a seller's buyers; in response to negative buyer feedback or an unusual spike in payments received; to protect PayPal against possible financial loss; and to comply with anti-money laundering regulations."

The company's spokesman Rob Skinner points out that PayPal has made it easier for a huge number of people to start a business online, without needing to set up merchant accounts with banks and credit card companies. "It's important to remember that other financial institutions also have risk and credit controls which can affect their business customers," he says.

But Shelley isn't the only disgruntled PayPal customer to contact The Independent. Among others, 49-year-old Steve Hudgell says his account was frozen with £350 in it when he moved to China. "They refused to unfreeze my account even after I explained my circumstances. It took around three months of emails before they relented and gave me my cash but the experience annoyed me so much I'll never use their services again."

PayPal's Rob Skinner is keen to suggest that the company is improving its customer service. "I'd like to say sorry to any PayPal customer who has had a bad experience. We've invested significantly in customer service over the last couple of years, with a new European customer service centre in Dublin.

"We've also significantly improved our buyer and seller protection programmes, helping our customers when things go wrong," says Skinner. "Most of our 14 million UK customers find that things go smoothly, and like the fact we don't share their financial details with the people and businesses they're paying."

Shelley's not convinced. "My legal background gave me the confidence to challenge PayPal's terms and I won," she says. "However, the vast majority of people do not challenge such terms. I believe this is due in part to PayPal's monopoly as an e-money issuer and customers' lack of legal expertise. My judgment has drawn attention to PayPal's unfair commercial practice and it needs to be addressed."