When money is tight, every payment can feel urgent, from a staff member who needs wages to a customer looking for a refund. HMRC may be applying pressure, and you may also be worried about your own income.
Before you make any payment, pause. Payments before liquidation can be reviewed later, especially if the company is insolvent or close to insolvency. Some payments may be reasonable. Others may create extra risk for you as a director.
Key Questions to Ask Before Making Any Payments
Before you make a payment, you need to consider more than just whether the company can afford it on that day. Instead, think about how that payment will look if you enter liquidation. Will someone reviewing the accounts view it as fair, necessary and properly recorded?
That may sound uncomfortable, but it is a useful test. When a company is struggling, the way money is paid out matters. It can affect creditors. It can affect staff. It can affect customers. It can also affect how your decisions are viewed later.
Before paying anyone, ask:
- Is the company insolvent, or likely to become insolvent?
- Who are you paying?
- Why are you paying them now?
- Are other creditors in a similar position being left unpaid?
- Is the payment necessary to protect the company’s value?
- Is the person you are paying connected to you?
- Could the payment reduce your own personal risk?
- Have you taken advice before moving the money?
You do not need to have every answer straight away, but if the company is under pressure, you should not treat payments as routine.
Why Payments Before Liquidation Can Cause Problems
If a company later enters liquidation, the liquidator will look at what happened before the liquidation began. This may include bank statements, transfers, wages, refunds, supplier payments, asset sales and payments to directors.
Many businesses continue making necessary payments while trying to manage a difficult period. A central concern, though, is whether one creditor will be in a better position than others.
That is why paying creditors before liquidation needs care. A payment made with good intentions can still come under scrutiny if it appears to favour one party unfairly.
For example, a payments may need closer review if made to:
- Connected companies
- Family members
- Suppliers linked to a director
- Creditors with a personal guarantee
- A director or shareholder
- One customer, while similar customers are left unpaid
Liquidation is not only about closing the company. It is also about dealing with creditors in the correct way. If you are unsure where a creditor may sit, it helps to understand the order of payment in liquidation before making further decisions.
Need help with payments before liquidation? Get advice from licensed insolvency practitioners at Anderson Brookes. Call 0800 1804 935 or email advice@andersonbrookes.co.uk.
How Director Duties Change When Insolvency Is Likely
When a company is solvent, directors usually focus on running the business for the benefit of the company and its shareholders. When insolvency is likely, that position changes. Creditors’ interests become central.
This means you should be thinking about how to avoid making creditor losses worse. You should also avoid choosing payments based only on pressure, loyalty, panic or personal exposure.
GOV.UK’s guidance on director duties upon insolvency explains that directors have specific duties when a company becomes insolvent, whether the company is still trading or has stopped.
This does not mean you cannot make any payments at all. It means each payment needs a clear reason.
Good reasons can include:
- Paying for essential work needed to complete a profitable order
- Paying for insurance needed to protect company assets
- Paying staff for work needed to preserve value
- Paying a supplier where the benefit is to creditors as a whole
Weaker reasons can include:
- “They shouted the loudest”
- “They are a friend”
- “I promised them first”
- “They are threatening me personally”
- “I just wanted to clear that one before liquidation”
If you are unsure, get advice before making the payment. It is often easier to deal with the issue before money leaves the account.
Can You Pay Staff Before Liquidation?
Staff wages are often the first concern. That is understandable. You may feel a strong personal responsibility to employees, especially if they have stayed loyal through difficult months.
In some cases, paying staff before liquidation may be reasonable. This may include wages for recent work or pay for employees who are still needed to protect the company’s position. But it is not always simple.
You need to think about whether:
- You are treating all staff consistently
- The company can pay everyone it owes
- Some employees are connected to directors
- The payment relates to work already done
- The payment helps protect value for creditors
If the company cannot pay all staff wages, redundancy, holiday pay or notice pay, there may be formal routes for employees to claim certain amounts after insolvency. GOV.UK’s redundancy claim service explains that employees may be able to claim money owed, such as redundancy pay, wages, holiday pay and commission, where an employer cannot pay because it is insolvent.
Employees may need a case reference number from the insolvency practitioner before starting some claims through the Redundancy Payments Service.
The key point is this: do not assume that paying staff directly is always the safest or fairest option. Speak to a professional first if the company is close to liquidation.
Can You Pay Suppliers Before Liquidation?
Supplier payments are one of the most common areas of concern.
A supplier may be chasing daily. They may be threatening legal action. They may be refusing to release goods. They may be essential to finishing customer work.
Some supplier payments can be justified. For example, if paying a supplier allows you to complete paid work and bring more money into the company, that may help creditors overall.
But paying an old supplier debt just because that supplier is applying pressure can be more risky.
Think about the difference between these two situations.
- A courier is needed to deliver finished goods that customers have already paid for. Without that delivery, the company loses value and customer claims increase. Paying the courier may have a clear commercial reason.
- An old supplier is threatening to “make life difficult” unless their historic balance is cleared in full. Other suppliers are in the same position, but they are not being paid. That payment could be harder to justify.
Supplier payments need extra care where the supplier is connected to you, a family member, another company you control or a creditor linked to a personal guarantee.
If a payment reduces your personal risk, it may be reviewed closely.
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Can You Refund Customers Before Liquidation?
Customer refunds can feel morally urgent. Someone may have paid a deposit. They may be waiting for goods. They may be distressed. You may want to do the right thing.
That instinct is understandable, but once the company is insolvent, customers are creditors too. Refunding one customer before liquidation may mean other customers, staff, suppliers or HMRC receive less.
Before refunding a customer, ask:
- Are there other customers in the same position?
- Can the company refund everyone fairly?
- Would completing the order be better than refunding it?
- Has the customer paid by card or finance?
- Is the refund being made because of pressure or because it is genuinely in creditors’ interests?
If there are several customers with deposits, consistency matters. Paying one person because they complained most loudly may create problems later.
Keep records. If you decide that a refund is necessary, write down why. If you decide not to refund because liquidation advice is needed first, record that too.
Can You Pay HMRC Before Liquidation?
HMRC debts can feel especially serious. VAT, PAYE and Corporation Tax arrears often build up when cashflow becomes tight. Letters, penalties and enforcement action can add pressure quickly.
You should not ignore HMRC. But you should also avoid making rushed payments without understanding the wider position.
HMRC may be a creditor in the liquidation. Depending on the type of tax owed, HMRC may also have a different level of priority compared with some other creditors.
That does not mean HMRC should automatically be paid before everyone else. It means the position needs to be assessed properly.
If you are considering a CVL, or you think liquidation is likely, speak to an insolvency specialist before paying HMRC, lenders or any creditor linked to a personal guarantee.
What About Paying Yourself?
This is a sensitive area, but it is important. Payments to directors are likely to be reviewed if the company later enters liquidation. This can include salary, dividends, expenses, loan repayments and transfers to connected people.
A normal salary for work genuinely done may be treated differently from a dividend or repayment of a director’s loan. Dividends should only be paid from distributable profits. If the company is insolvent, dividends can be problematic.
An overdrawn director’s loan account can also create issues. If you have taken more from the company than you were entitled to, you may be asked to repay it.
You should be especially careful about:
- Repaying your own director’s loan before other creditors
- Paying dividends when profits are not available
- Taking extra salary shortly before liquidation
- Paying expenses without clear evidence
- Moving money to a spouse, family member or connected business
Don’t panic if some payments have already been made. Gather the records and get advice. The earlier you speak to a licensed IP, the easier it is to understand your options.
Checklist: Before Making Payments
Before making payments before liquidation, work through this checklist.
- Is the company insolvent?
Can the company pay debts as they fall due? Are liabilities greater than assets? Are creditors waiting longer than usual? - Is the payment essential?
Would not making the payment damage the company’s position or reduce returns to creditors? - Who benefits?
Does the payment help creditors as a whole, or mainly one person? - Is the creditor connected?
Connected payments are more likely to be reviewed. - Is there a personal guarantee?
If the payment reduces your personal liability, get advice first. - Are similar creditors being treated differently?
If so, can you explain why? - Can you evidence the decision?
Keep notes, emails, invoices, cashflow forecasts and advice received. - Have you spoken to an insolvency practitioner?
If liquidation is likely, advice before payment is usually safer than explanations afterwards.
Keep Clear Records
Good records do not make a poor decision safe. But they can help show why a decision was made.
Keep copies of:
- Bank statements
- Payment requests
- Creditor demands
- Board notes
- Cashflow forecasts
- Supplier invoices
- Customer refund requests
- Payroll records
- Advice received
If a payment is later reviewed, vague memories are not enough. You need to be able to explain the decision clearly.
A short note can help. For example: “We paid this supplier because the goods were required to complete paid customer orders. Without the payment, the company would have lost the customer income and increased creditor claims.”
When to Consider Liquidation
If you are deciding who to pay because there is not enough money for everyone, that is a warning sign.
At that point, making one payment after another may increase risk. It may also make the situation harder to control.
Liquidation may not be the only option, but it should be considered if:
- The company cannot pay debts as they fall due
- HMRC, suppliers or lenders are taking action
- Staff wages cannot be met
- Customer deposits cannot be fulfilled
- You are using personal funds to keep the company going
- You are unsure whether trading should continue
There are different types of liquidation, and the right route depends on whether the company is solvent or insolvent. If the company has debts it cannot pay, you may need advice on closing your limited company in a controlled and legal way.
At Anderson Brookes, we help directors understand what they can and cannot do before liquidation. We can explain the risks, review the company’s position and help you decide whether formal liquidation advice is now needed.
FAQs About Payments Before Liquidation
Can I pay staff wages before liquidation?
Sometimes, yes. But it depends on the company’s position, the reason for payment and whether all staff are being treated fairly. If the company is insolvent, get advice before paying some employees and not others.
Can I pay one supplier because they are threatening legal action?
Pressure alone is not usually a good reason to prefer one creditor. If the supplier is essential to preserving value for creditors, the payment may be easier to explain. Keep records and take advice first.
Can I refund one customer before liquidation?
Be careful. A customer owed a refund may be a creditor. Refunding one customer while others are left unpaid can create issues. You should consider whether customers in similar positions are being treated consistently.
Can I pay HMRC before liquidation?
HMRC debts should be taken seriously, but you should not assume HMRC must always be paid first. The correct approach depends on the type of debt, the company’s wider position and whether liquidation is likely.
Will every payment be investigated?
A liquidator will review the company’s records. Not every payment will be a problem. The key questions are usually why the payment was made, who benefited and whether the decision was reasonable at the time.
What if I have already made a payment?
Do not panic. Make a note of why the payment was made and gather the evidence. Then speak to an insolvency practitioner as soon as possible. Early advice can help you understand the position before more decisions are made.
Get Advice Before You Pay
If you are about to pay staff, suppliers, customers, HMRC or yourself, pause before moving the money. A short conversation now can help you avoid a bigger problem later.
At Anderson Brookes, we give calm, confidential advice to directors dealing with company debt and possible liquidation. We will help you understand your duties, your options and the safest next step.
You do not have to manage this alone. Speak to Anderson Brookes before making payments before liquidation, and we will guide you clearly from there.
Call us today on 0800 1804 935, email us at advice@andersonbrookes.co.uk or contact us online.