If you’ve taken customer deposits and now can’t complete the work, it can feel like everything is closing in at once. Customers may be asking for updates. Suppliers may be chasing payment. You may not know whether to refund people, finish some jobs, stop trading or keep going.
The most important thing is not to panic, guess or make promises you cannot keep. There are practical steps you can take now to protect customers, creditors and your own position as a director.
First Step: Stop Taking New Deposits
If you are not sure you can complete the work, stop taking new deposits straight away.
This may feel difficult, especially if the business needs cash. But taking more money when you are unsure whether you can deliver can make the situation worse. It can also raise serious questions later about what you knew, when you knew it and whether customers were treated fairly.
You should:
- pause new deposit requests
- remove payment links where possible
- stop taking advance payments for new work
- tell staff not to accept deposits without approval
- avoid using new customer money to deal with older debts
This does not mean your business is definitely beyond saving. It means you are creating breathing space while you review the position properly.
Check Whether the Company Is Insolvent
A company may be insolvent if it cannot pay its debts when they fall due, or if its liabilities are greater than its assets. This means the company either cannot keep up with payments, or owes more than it owns.
If you have taken customer deposits, ask if you can:
- afford to buy the materials
- pay staff or subcontractors to finish the work
- meet existing supplier, tax, rent and loan payments
- complete existing jobs without relying on future deposits
If the answer to any of these is “no” or “not sure”, you should treat the position seriously. Our guide to dealing with an insolvent business explains the wider signs, tests and options.
This is not unusual. The latest Insolvency Service figures show there were 2,085 company insolvencies in England and Wales that month, including 1,510 creditors’ voluntary liquidations. Many directors are dealing with difficult cash flow, higher costs and creditor pressure.
Early advice usually gives you more options.
Make a List of Every Customer Deposit
Before you decide what to do next, get the facts in one place. Create a simple record of every customer who has paid a deposit or advance payment. Include:
- the customer’s name
- the amount paid and date payment was received
- what the payment was for
- what work has been completed and what remains unfinished
- whether materials have been ordered or delivered
- the estimated cost to complete the job
- whether the customer has asked for a refund
- any messages, complaints or threats of legal action
Keep copies of emails, quotes, invoices, payment receipts, contracts, text messages and job notes.
Good records matter. They help you understand whether the business can still complete the work. They can also help show that you acted responsibly and made decisions based on evidence, not pressure.
Contact Anderson Brookes for a free, confidential assessment of your options. Call 0800 1804 935 or email advice@andersonbrookes.co.uk.
Favouring One Customer Over Another
Once insolvency is likely, your focus as a director changes. You need to think about creditors as a whole.
Customers who have paid deposits may now be creditors if the company cannot complete the work or refund them. Suppliers, HMRC, lenders, landlords and subcontractors may also be creditors.
This is where caution is needed. It may feel natural to refund the customer who is shouting the loudest, threatening a bad review or saying they will come to your premises. You may also feel pressure to refund a friend, relative or long-standing customer first.
But if the company is insolvent, paying one person ahead of others can cause problems. GOV.UK guidance on director duties upon insolvency says directors must protect company assets, treat creditors the same and avoid worsening the position of creditors.
Before you make payments, step back and review the wider position. Our guide to key questions about insolvency may help you think through the issues before taking action.
Be Careful Before Refunding Selectively
Refunding customers is not always wrong. But selective refunds can be risky if the company cannot afford to repay everyone.
For example, problems can arise if you:
- refund connected people first
- repay one customer because they are threatening legal action
- use money from new deposits to refund older deposits
- repay customers while ignoring HMRC, staff or suppliers
- move company money into a personal account
- promise refunds you know the company cannot make
This is why it is important to speak to a licensed IP before making decisions that could affect creditors. A licensed insolvency practitioner can review the company’s position and explain what you can and cannot safely do.
At Anderson Brookes, we help directors understand these issues without judgment. If the company can still trade, we will explain that. If it can’t, we will talk you through the formal options.
Can You Still Complete the Work?
The next question is whether the company can realistically complete the jobs it has taken deposits for.
This needs an honest assessment. Hope is not enough. You need to know whether the company has the money, materials, labour and time to deliver.
If the work can be completed
If the company can complete the work without worsening the position for creditors, finishing the job may be the best outcome.
But you should still be careful. Make sure the cost of completion is properly calculated. Do not rely on vague assumptions. Do not take further customer money unless you are confident the work can be done.
If only some work can be completed
This is more difficult. Choosing which customers to help can create unfairness. You may be tempted to finish the jobs that are easiest, closest to completion or most likely to produce quick cash. That may be reasonable in some cases, but it needs to be reviewed carefully.
If insolvency is likely, you should take advice before choosing some customers over others.
If the work cannot be completed
If the company cannot complete the work, do not make false promises.
You may need to tell customers that the company is reviewing its position and taking professional advice. Keep communication calm, factual and consistent. Avoid promising payment dates or completion dates unless you know they are achievable.
Deposits and Stage Payments in Construction
Customer deposits are common in construction, home improvement, trades and installation work. They may be used to secure labour, order materials or reserve a start date.
But this can create risk when costs rise, subcontractors pull out or the company falls behind on older jobs. A business can start using deposits from new jobs to keep previous jobs moving. Once that happens, the position can deteriorate quickly.
If this sounds familiar, our guide to the warning signs of construction insolvency explains the red flags to look for, including cash flow pressure, delayed payments, supplier issues and difficulty completing contracts.
The key point is simple. If deposits are no longer being used for the work they relate to, you need advice.
What Customers May Do Next
Customers may ask for a refund. Some may contact their bank or credit card provider. Others may make a formal complaint or threaten court action.
If the company enters liquidation, customers who have paid for unfinished work may need to register as creditors. Citizens Advice explains that when a company has gone out of business, customers may be able to try to recover money depending on how they paid, but they may not receive everything back. It also explains that customers can register a claim as a creditor where money is owed.
This is another reason not to make informal promises. If there are several customers, supplier debts and tax arrears, the company’s money may need to be dealt with through a formal insolvency process.
Why Director Conduct Matters
Taking deposits while insolvent does not automatically mean you have done something wrong. Many directors take deposits in good faith, expecting to complete the work. The issue is what happened when the position changed.
A liquidator or administrator may look at:
- when the company first showed signs of insolvency
- whether there was a realistic plan to complete the work
- whether deposits were taken after you knew delivery was unlikely
- how customer money was used
- whether some customers or creditors were treated more favourably
- if company records were accurate
- whether you took professional advice
Within three months of a company entering formal insolvency proceedings, the office-holder must submit a director conduct report. If an investigation is opened, the director may be asked to comment on the issues being considered. The insolvent investigation process can include questions about how decisions were made before the company entered insolvency.
This is why early advice is so important. It can help you avoid decisions that look reasonable in the moment but create problems later.
What Are Your Options If The Company Cannot Recover?
If the company cannot complete the work or repay deposits, you may still have options.
The right route depends on whether the business can survive, what debts it has, what assets remain and whether trading can continue without making creditors worse off.
Possible options may include:
This needs an honest assessment. Hope is not enough. You need to know whether the company has the money, materials, labour and time to deliver.
Informal creditor discussions
This may help if the company is under short-term pressure but has a realistic route back to stability.
Company Voluntary Arrangement
A CVA may allow a viable company to keep trading while making agreed payments to creditors over time
Administration
Administration may be used where there is a business to rescue, restructure or sell.
Creditors’ Voluntary Liquidation
If the company cannot continue, voluntary liquidation can provide an orderly way to close the business. A licensed insolvency practitioner is appointed, company assets are dealt with and creditors are contacted through the correct process.
The right answer is not always obvious. That is why Anderson Brookes starts by reviewing your position and explaining the options clearly.
What Not to Do
When customer deposits are involved, certain actions can make matters worse.
Try not to:
- keep taking deposits when you are unsure you can complete the work
- use new deposits to plug old cash flow gaps
- refund selected customers without advice
- ignore customer messages completely
- promise refunds the company cannot afford
- transfer company assets out of the business
- pay connected people first
- apply to strike off an insolvent company without advice
- rely on unregulated advice
You don’t need to have all the answers before asking for help. In fact, it is usually better to ask before making major decisions.
FAQs
Can I refund customer deposits if my company is insolvent?
Possibly, but you should take advice first. If the company cannot repay everyone, refunding selected customers may be treated as unfair to other creditors. A licensed insolvency practitioner can help you understand what is safe and appropriate.
Am I personally liable for customer deposits?
Not automatically. A limited company is a separate legal entity. However, directors can face personal risk in some situations, especially if the company has been mismanaged, creditors have been made worse off or deposits were taken when there was no realistic prospect of completing the work.
Is taking a deposit while insolvent illegal?
It depends on the facts. The key questions are what you knew at the time, whether the company had a realistic chance of completing the work and how you acted once the financial position became clear. If you are worried, take advice as soon as possible.
Should I tell customers the company is in trouble?
You should avoid misleading customers. But you should also be careful about making promises before you understand the company’s position. A simple, factual update may be appropriate while you take insolvency advice.
What if a customer threatens court action?
Do not panic and do not pay that customer ahead of everyone else without advice. Keep a record of the contact, stay calm and get professional guidance. If the company is insolvent, creditor pressure needs to be handled carefully.
Talk to Us Before Making Major Decisions
If you’ve taken customer deposits and now cannot complete the work, the next step matters.
You may still have options. You may be able to complete some work, agree a route forward or place the company into a formal process that deals with creditors properly. But you should avoid guessing, paying people selectively or continuing to take deposits when you are unsure whether you can deliver.
At Anderson Brookes, we give clear, confidential insolvency advice without judgment. We will help you understand whether the company is insolvent, what your duties are and what the safest next step may be.
Speak to Anderson Brookes today and get regulated advice before you make any further decisions. Call us today on 0800 1804 935, email us at advice@andersonbrookes.co.uk or contact us online.