Can Directors Pay Themselves Before Liquidation?

If your company is drifting toward insolvency and you are asking whether you can still take a salary, a dividend, or clear down the director’s loan, the honest answer is: sometimes yes, often no, and almost always under tighter scrutiny than most directors realise.

A payment that looked routine six months ago can still be unwound by a liquidator under sections 238, 239, 214 or 212 of the Insolvency Act 1986, and the money can be clawed back from you personally. We see this every week in our caseload, and the pattern is always the same: directors who documented nothing, and directors who did not realise their duties had shifted.

What follows is the plain version. What you can legally pay yourself as the company enters the twilight zone, which payments attract the highest risk, and how a liquidator will look at what you did. It is written from our position as licensed insolvency practitioners at Company Debt, and reflects how we advise directors at first contact.

The Quick Answer for Directors

You can still pay yourself a reasonable salary for work genuinely performed, and you can reclaim legitimate business expenses. Everything else gets harder the closer the company moves to insolvency.

Dividends can only be paid out of distributable profits, and a company with no distributable reserves cannot lawfully pay one. Repaying your director’s loan account to yourself ahead of trade creditors is one of the fastest routes to a preference claim under section 239.

And if the company is already cash-flow insolvent, any payment to you will be examined against the duty you owe to creditors under BTI 2014 LLC v Sequana SA [2022] UKSC 25.

In short: if the company can meet its liabilities, your normal remuneration is broadly safe. If it cannot, your duties shift, and the protection of the corporate veil narrows sharply. We tell directors to stop thinking of themselves as shareholders from that point on, and start thinking like stewards of the creditors’ fund. Our guide to a director’s position in liquidation covers how that role plays out once a liquidator is appointed.

Why Twilight Zone Duties Bite Directors Hardest

The “twilight zone” is the period where a company is insolvent or likely to become insolvent but has not yet entered a formal procedure. Under BTI v Sequana, the Supreme Court confirmed that the duty to consider the interests of creditors arises when insolvency is “probable”, not just when it is inevitable.

The moment you know the company cannot pay its debts as they fall due, or its liabilities exceed its assets on a balance-sheet basis under section 123 of the Insolvency Act 1986, your duties have moved. Every payment you authorise from that point will be read against those duties.

Our experience is that directors rarely recognise the transition when they are in it. They see a bad month, a missed customer payment, a squeezed bank account, and they assume they can trade through. Sometimes they can.

But if the company later fails, the liquidator will not have the benefit of your optimism. They will have the bank statements, the filings, and the cashflow forecasts. They will ask whether a reasonable director in your position ought to have concluded that insolvency was probable. If the answer is yes, every director payment made after that date is on the table. Stepping down does not draw a line under this either, as our guide to a director resigning before liquidation explains.

Salary Directors Can Still Take

A director taking a reasonable salary for work actually performed is usually on safe ground, even when the company is struggling. Salary is an expense of the business, not a distribution of profit, so the profit-reserves rules that govern dividends do not apply.

What the liquidator will test is whether the salary was (a) commercially reasonable for the role, (b) consistent with your historical pay pattern, and (c) processed through PAYE with proper tax and NIC deductions.

Where we see trouble is when directors suddenly increase their pay in the months before failure, or when they pay themselves a notional “salary” that was never run through payroll. Both patterns look like extraction to a liquidator.

Both can be attacked as transactions at undervalue under section 238 if the company received nothing equivalent in return. If your business is struggling and you need to take less, that usually helps your defence. If you need to take more to cover personal costs, you should be getting advice first.

Dividends Directors Cannot Lawfully Pay

Dividends are the area where we see the most director liability. The rule is simple and inflexible: a company can only declare a dividend out of distributable profits, meaning accumulated realised profits less accumulated realised losses.

This is set out in Part 23 (sections 829 to 853) of the Companies Act 2006. If the company does not have the profits, any dividend declared is unlawful, and under section 847 the directors can be ordered to repay it personally if they knew or had reasonable grounds to believe the distribution was unlawful.

Two pitfalls recur in the cases we handle. First, directors rely on last year’s signed accounts and assume the profits are still there, when in fact a loss-making year since has wiped them out. Interim dividends must be supported by interim accounts that show distributable reserves exist at the date of payment.

Second, directors treat monthly dividends as a substitute for salary. This worked when the company was trading profitably. It stops working the moment profits evaporate, and the liquidator will reclassify each “dividend” as an unauthorised return of capital or a loan to the director.

If you have been taking regular dividends and your accountant cannot point to signed interim accounts confirming distributable reserves, you should assume those payments will be challenged if the company goes into creditors’ voluntary liquidation or compulsory winding-up.

We routinely see directors surprised by this. Our advice is always the same: stop taking dividends the moment the profit picture becomes uncertain, and switch to a documented salary instead.

Loan Account Repayments to Directors

This is the single most dangerous payment a director can make in the twilight zone. If you are owed money by the company (a credit balance on the director’s loan account) and you decide to pay yourself back ahead of trade creditors or HMRC, you are almost certainly preferring yourself within the meaning of section 239.

The clawback window is two years for connected parties, which includes directors, and the liquidator does not have to prove you intended to prefer, only that the company was insolvent and you received more than you would have done in the liquidation.

The mirror problem is a debit balance. If you owe the company money, the liquidator will demand it back personally, together with the section 455 corporation tax charge HMRC applies to overdrawn director loans.

We have seen directors blindsided by this on day one of a CVL, discovering that they owe the company tens of thousands of pounds they thought were “just paperwork.” A debit DLA is not paperwork. It is a debt you owe the creditors, and the liquidator will pursue you for it.

If you are approaching insolvency with a debit balance, get advice on how to address it before the process begins. More on the mechanics in our guide to the director’s loan account in liquidation.

Expenses Directors Can Still Reclaim

Reclaiming genuine business expenses remains legitimate even as the company heads toward insolvency, provided the expenses are real, documented, and incurred wholly and exclusively for business purposes. The test is the same one HMRC applies.

What gets directors into trouble is the grey area: the family meal treated as client entertainment, the personal phone bill run through the company, the home office claim with no supporting calculation. These get reversed routinely when a liquidator goes through the expense claims.

Our rule for directors in the twilight zone is simple: keep receipts for everything, stop any expense that would embarrass you in a liquidator’s interview, and never backdate claims. A liquidator looking at a company in difficulty will focus on the six months before formal insolvency, and expense reimbursements to directors are one of the first categories they test.

Redundancy Claims Available to Directors

If you are an employee of the company as well as a director, which most owner-managers are, you may have a statutory claim for redundancy, unpaid wages, holiday pay, and notice pay when the company enters liquidation.

These are paid from the National Insurance Fund via the Insolvency Service, not from company assets, and they are a legitimate recovery for a director who has genuinely worked in the business. To qualify you need a contract of employment, PAYE records, and at least two years of continuous service. The average successful claim is in the region of £9,000 to £12,000.

We flag this because directors in financial distress often do not realise they may be entitled to anything at all. It is not “taking money from the company.” It is a statutory employee entitlement that sits alongside the insolvency process. Our team handles redundancy claims as part of our CVL work, and in most cases the money comes through within six to eight weeks of appointment.

Six Clawback Provisions Directors Should Know

If the liquidator believes a payment to you was improper, they have a toolkit of statutory provisions to reverse it and recover the money from you personally. Six matter most:

• Section 238 (transactions at undervalue). Captures payments or asset transfers where the company received nothing, or less than market value, in the two years before insolvency.
• Section 239 (preferences). Captures payments that put one creditor (including you) in a better position than they would have been in the liquidation. Two-year lookback for connected parties.
• Section 214 (wrongful trading). If you continued to trade when you knew, or ought to have known, there was no reasonable prospect of avoiding insolvency, you can be ordered to contribute to the company’s assets personally.
• Section 212 (misfeasance). A summary remedy the liquidator can use against directors who have misapplied company money or breached fiduciary duty. Often used alongside section 214.
• Sections 213 and 246ZA (fraudulent trading). Reserved for the worst cases, where the business was carried on with intent to defraud creditors. Carries both civil and criminal consequences.
• Section 423 (transactions defrauding creditors). No time limit. Captures asset transfers made to put property beyond the reach of actual or future creditors.

Our view is that directors do not need to memorise the statute. They need to understand the pattern: the closer the payment to the formal insolvency date, the more carefully it will be examined, and the higher the risk that it will be reversed and recovered from them personally. See our guide on wrongful trading for the director-liability side.

Timing Checkpoints Before Liquidation

The calendar matters more than most directors realise. We walk clients through four checkpoints:

1. Before insolvency is probable. Normal remuneration is broadly safe. Keep documentation, process through PAYE, and ensure dividends are supported by interim accounts showing distributable reserves.
2. Twilight zone (insolvency probable but not inevitable). Duty to creditors arises. Review every director payment. Stop dividends unless distributable reserves are certain. Document every decision in board minutes.
3. Insolvency inevitable. Stop all non-essential payments to directors. Take advice from a licensed insolvency practitioner before making any payment. Section 127 will apply from the petition date if the route is compulsory liquidation.
4. After formal insolvency begins. The insolvency practitioner controls the estate. Director authority ends. Any prior payments in the relevant lookback period are open to challenge.

Our advice at checkpoint two is always the same: get a second opinion, in writing, from a licensed IP before you take anything. It costs you nothing, and it may save you tens of thousands in clawback later.

Patterns Liquidators Flag in Director Pay

When we are appointed as liquidator, our investigation into director payments follows a consistent pattern. We pull the bank statements for the period the lookback allows, which is two years for connected-party transactions.

We reconcile every director payment against payroll records, the loan account ledger, declared dividends, and supporting board minutes. We test the company’s solvency at the date of each payment by reconstructing a rough balance sheet and cashflow position. And we compare the pattern of director payments with the pattern of creditor payments over the same window.

Where the pattern is clean, the director walks away. Where directors were paid smoothly while HMRC and trade creditors were held off, we flag a preference. Where dividends were declared with no supporting interim accounts, we flag an unlawful distribution. Where salary spiked in the final months, we flag a transaction at undervalue.

Then we write to the director setting out the findings and giving them an opportunity to respond before we pursue recovery. A well-advised director can often settle these claims for a fraction of the face value, but only if they have the records to prove their case.

Common Myths Directors Bring to First Calls

“It’s my company, I can pay myself what I like.” Only while the company is solvent. The moment insolvency becomes probable, your duties shift and your freedom narrows. This is the clearest effect of BTI v Sequana.

“I already paid tax on the dividend, so it’s mine.” The tax status of the dividend in your hands is separate from whether it was lawfully declared. If the company had no distributable reserves, the dividend is unlawful and you can be ordered to repay it regardless of your personal tax position.

“I’ll just repay my director’s loan before anyone notices.” The liquidator will notice. Bank statements show everything, and the section 239 lookback for connected parties is two years. Clearing a credit DLA in the run-up to insolvency is one of the most attackable payments a director can make.

“Expenses don’t matter, they’re only small.” They matter because they signal intent. A pattern of personal costs run through the company in the months before failure tells the liquidator more about director conduct than any single large payment.

Director Checklist Before You Pay Yourself

• Can the company pay its other debts as they fall due? If not, insolvency is probable and your duties have shifted.
• Is the payment salary, and is it reasonable for the role you perform?
• If it is a dividend, do you hold signed interim accounts at the payment date showing distributable reserves?
• If it is a DLA repayment, are you being paid ahead of trade creditors or HMRC? If so, stop.
• If it is an expense reimbursement, is the expense documented, receipted, and genuinely business-related?
• Have you documented the decision in a board minute? If not, do it now.
• Have you taken advice from a licensed insolvency practitioner? If insolvency is probable, you should.

FAQs on Director Pay Before Liquidation