Copy article

Directors Of Insolvent Companies Must Not Pay Suppliers Ahead Of HMRC

ended 12. August 2026

When cash is short the commercial instinct is obvious. Pay the supplier who keeps the doors open, and let the HMRC bill wait, because one can stop supplying tomorrow and the other sends a letter. On 10 August 2026 the Insolvency Service published a new Director information hub page saying that once a company is insolvent, that choice is no longer the director's to make. Creditors must be treated equally. Paying off a main supplier while ignoring HMRC debts could lead to an insolvency practitioner recovering the payment, to director disqualification, and to HMRC asking for security from a new company. There were 1,158 director disqualifications in Great Britain in 2025/26 resulting from Insolvency Service enforcement, at a mean length of 8.1 years. The same page names the two defences an owner-manager would reach for and rejects both: “A lack of financial knowledge is no defence”, and “Doing nothing or lack of knowledge is not an excuse”. It also tells directors not to repay personally guaranteed debts ahead of others, which is the debt they are most motivated to clear. The catch is the trigger. The duty changes as insolvency nears, and most owner-managers cannot date it.

  1. The Insolvency Service says a director does not need to be a financial expert, but must understand the basics and seek professional advice where needed. Is understanding the basics a realistic standard for the owner-manager of a small company, and who is supposed to supply it?
  2. Is it right that the personally guaranteed debt, the one with the director's own name on it, is named as one they must not clear first?
  3. What is the practical test a director should use to work out whether the company has crossed into insolvency, and whose job is it to tell them? Do you have a client whose decisions this would change? If so, please give as much colour and detail as possible.

5 responses from the Newspage community

Copy all

Star Quote
Copy

Editor
Harvey Dhillon
Founder & CEO at Zmartly
Asking a director to understand the basics is fair. Leaving nobody responsible for teaching them isn't. A small company can be exempt from audit, so there is no auditor to raise a hand. Naming the personally guaranteed debt is right too. Paying that loan clears your own liability, so the one really being paid is you, and because you count as connected the law starts from the assumption that you meant to put yourself first, and a liquidator can look back over the 2 years before the company failed rather than the 6 months. In practice it comes down to two questions: can you pay your debts as they fall due, and are your assets worth less than your liabilities once you count the bills that have not landed yet and the ones that only bite if something goes wrong. Those last two can sit in a note rather than on the face of the balance sheet, and where that leaves you is nobody's job but your own.
Copy

Editor
Tony Redondo
Founder at Cosmos Currency Exchange
The question is whether the business is solvent or already insolvent and trading ultra vires? Directors' instinct is to pay key suppliers or personally guaranteed debts first and let HMRC slide. But limited liability is a privilege, not a right. Once a company's insolvent, the director's duty shifts from shareholders to creditors, treated equally under pari passu. You need to grasp basic cash flow, track liabilities, and take advice from an accountant or Insolvency Practitioner when things turn. Paying a personally guaranteed debt ahead of HMRC is an unlawful preference under Section 239 of the Insolvency Act 1986 and invites clawback and disqualification. Two tests matter: Cash Flow (can you pay debts as they fall due) and Balance Sheet (do liabilities exceed realisable assets). Using unpaid tax as working capital is a red flag. Spot that tipping point, stop the selective payments, and negotiate with HMRC or call in an Insolvency Practitioner before it becomes personal.
Copy

Editor
David Stirling
Independent Financial Adviser at Mint Wealth
There's something rich about telling directors that ignorance is no defence when nobody hands them the knowledge in the first place. Most business owners only learn the rules of insolvent trading once the smoke alarm's already gone off, usually from an accountant who's spotted a missed payment.

The instruction not to clear a personally guaranteed debt first is legally sound but psychologically brutal. You're asking someone to act against their own interest at the exact moment they're least equipped to think straight and possibly in a dark place both personally and professionally.

The test that actually matters is simple: can we pay our bills as they fall due, and do liabilities now exceed assets? The moment either looks doubtful, not once it's obvious, is when to call for help. By the time it's glaringly obvious, most of the options will have usually evaporated.
Copy

Editor
Nouran Moustafa
Practice Principal & IFA at Roxton Wealth
The ‘basics’ are a realistic standard, but only if directors are actually taught them. Running a small business does not automatically make someone an insolvency expert. Your accountant should be an early warning system, but the director still has to understand cashflow, debts and when to ask for help.

The personally guaranteed debt rule feels harsh because that is the bill a director is most emotionally motivated to clear. But once insolvency is in play, protecting yourself cannot come before protecting the company’s creditors.

The practical warning signs are simple: can the business pay bills as they fall due, and are its liabilities greater than its assets? Persistent HMRC arrears, suppliers being paid late or relying on tomorrow’s income to settle yesterday’s bills should trigger advice immediately. The danger is waiting for someone to officially declare the business insolvent — by then, key decisions may already have been made.
Copy

Editor
Zac Santer
Director at South Digital
We saw this from the supplier side. An agency commissioned around £20,000 of work from us in two months, paid £5,000, then entered administration. The creditor position later showed roughly £800,000 owed to HMRC. As payments fell behind, we were repeatedly asked to finish a live client project on the promise that we would be paid when their client paid. We stopped. That prevented a larger loss, but still left us around £15,000 out of pocket. I cannot say when the company legally became insolvent, but the warning signs were clear: unpaid work growing quickly, partial payments, repeated assurances and existing debts depending on uncertain future receipts. A director needs a current cash-flow forecast, aged-creditor list and honest balance-sheet review. If bills cannot be paid when due without the next hoped-for receipt, that should trigger specialist advice. Not another promise to a supplier.