When cash is short, you cannot simply choose who to pay first because a company is struggling — UK insolvency law sets a strict order for creditor payments, and picking favourites outside that order can expose you personally to legal risk. This guide explains how creditor priority actually works, where directors go wrong, and what you can do instead while cash is tight.
Most directors feel a natural pull to pay whoever shouts loudest, or whoever they have the closest relationship with — a key supplier, a friendly bank manager, even themselves. That instinct is understandable, but it can create serious legal problems if the company later becomes insolvent.
Who to pay first when your company is struggling
The honest answer is that, while a company is solvent and trading normally, directors have some discretion over which bills get paid when. Paying a supplier before HMRC is not automatically illegal. But that discretion narrows sharply once insolvency is on the horizon.
Once there is a real risk of the company being unable to pay its debts, the law expects directors to think about all creditors fairly, not just the ones applying the most pressure. If you are already feeling that squeeze, our guide to a Business Cashflow Crisis: How to Take Control covers the first practical steps.
How creditor priority actually works
If a company does end up in formal insolvency — liquidation or administration — there is a legal order in which available funds are distributed. Broadly, it runs:
- Secured creditors with a fixed charge — for example, a lender secured against a specific asset.
- Preferential creditors — mainly certain employee claims (unpaid wages and holiday pay, up to set limits) and some HMRC debts.
- Secured creditors with a floating charge — security over general assets like stock.
- Unsecured creditors — most trade suppliers, and HMRC for the remainder of its claim.
- Shareholders — paid only if anything is left, which is rare.
This order is set out in the Insolvency Act 1986 and is applied by the insolvency practitioner handling the process, not chosen informally by the director.
The danger of unlawful preferences
A "preference" is when a company pays or otherwise favours one creditor over others shortly before insolvency, putting that creditor in a better position than they would have been in otherwise. Deliberately doing this — for example, repaying a director's loan or a friendly supplier just before the company collapses — can be challenged later.
If a liquidator or administrator finds an unlawful preference, they can apply to court to have the payment reversed, and the person who received it may have to repay the company. Preferences to a "connected person", such as a director or close family member, are looked at even more closely under section 239 of the Insolvency Act 1986 on preferences.
This is why paying yourself, or one favoured creditor, ahead of everyone else can come back to bite you — sometimes months after the event.
When your duty shifts to protecting creditors
Normally, directors owe their duties to the company and its shareholders. But once insolvency becomes likely, the law expects that focus to shift towards the interests of creditors as a whole. This is sometimes described as the point where your duty "flips".
Continuing to trade and run up further debt when you know, or ought to know, the company cannot avoid insolvency can amount to wrongful trading. Government guidance on director responsibilities during insolvency sets out what is expected of you at this stage, and it is worth reading if things are getting tight — see running a limited company: company insolvency guidance.
If wages are part of the pressure, our article on what happens when a Company Can't Pay Wages: What Are Your Options? looks at that specific, high-stakes situation.
Practical, lawful ways to manage limited cash
You do not have to choose between doing nothing and doing something risky. There are practical, lawful steps available while you work out the company's options:
- Get an up-to-date cashflow picture — know exactly what is owed, to whom, and when it is due.
- Talk to HMRC early if tax is the issue — a Time to Pay arrangement can spread the debt, and applying before enforcement action starts is far better than after. Details are on the gov.uk page for help if you cannot pay your tax bill on time.
- Communicate with creditors rather than going silent — most are more flexible than directors expect if approached early.
- Keep clear records of every decision and the reasoning behind it, in case the situation is reviewed later.
- Avoid new credit or new orders you cannot realistically pay for.
If creditors are already chasing hard, see Dealing With Creditor Pressure: A Director's Guide for a calmer, structured way to respond.
Why professional advice protects you here
Deciding who to pay first when a company is struggling is genuinely difficult to get right without support, because the legal position changes depending on how close the company is to insolvency — something that is not always obvious from the inside. A regulated insolvency practitioner or solicitor can assess the company's actual financial position and explain, in plain terms, what your duties are at this stage.
Getting that assessment early gives you far more options — including formal rescue routes that are only available before creditors take enforcement action, such as a winding-up petition.
Frequently asked questions
Can I pay myself before other creditors?
You should be very cautious. Paying yourself, repaying a director's loan, or favouring a connected person ahead of other creditors can be challenged as an unlawful preference if the company later becomes insolvent.
Can I keep paying essential suppliers and not others?
Keeping the business running with genuinely essential suppliers is usually reasonable while the company is solvent, but the closer you get to insolvency, the more this needs to be a considered, documented decision rather than a habit.
Can I get more time to pay HMRC?
Often, yes. HMRC can agree a Time to Pay arrangement, spreading tax debts over months rather than demanding payment in full immediately. It is generally easier to arrange before enforcement action, such as a winding-up petition, has started.
What counts as an unlawful preference?
Broadly, it is a payment or action that puts one creditor in a better position than others shortly before insolvency, made with the intention of favouring them. It can be challenged and reversed by a liquidator or administrator afterwards.
Does the order of creditor priority ever change?
The statutory order in formal insolvency is fixed by law, though the specific preferential debts and thresholds are set by government and can be updated, so it is worth checking current figures rather than relying on memory.
This article is general information, not legal, financial or insolvency advice, and does not consider your company's specific circumstances.
If you would like to talk through your options calmly and confidentially, Harbourfirst can introduce you to a regulated insolvency specialist — start an enquiry.