Customer Deposits When a Company Is in Trouble… Can You Keep Taking Them?

by | Jul 1, 2026 | Creditor, Supplier and Employee Issues

Your company is running short of cash.

Suppliers are pressing. HMRC is overdue. The overdraft is near its limit.

Then a new customer offers to pay you a £5,000 deposit.

For a director under pressure, that money can look like oxygen.

But there is an uncomfortable question…

Can the company genuinely deliver what the customer is paying for?

Taking customer deposits isn’t automatically wrong because a company is experiencing financial difficulty. But continuing to accept money when there is no reasonable prospect of fulfilling the order can create serious problems for the company and its directors.

What is a customer deposit?

A customer deposit is money paid before all the goods or services have been supplied.

It might be:

  • a deposit for new windows or a kitchen;

  • payment for materials before building work starts;

  • an advance payment for machinery;

  • a wedding or event booking;

  • a subscription paid annually in advance;

  • money placed on a gift card or customer account.

The company receives the cash today.

The obligation to deliver comes later.

That distinction matters.

The deposit isn’t simply spare cash. It brings a corresponding liability to supply the goods, complete the work or repay the customer.

Can an insolvent company accept new deposits?

There is no simple rule saying that a financially distressed company must immediately stop accepting every advance payment.

The real issue is whether the directors have reasonable grounds for believing that the company can fulfil the order.

The Insolvency Service says directors of an insolvent company must protect company assets, avoid worsening creditors’ position and minimise the amount that creditors may ultimately lose.

In practical terms, directors should ask:

  • Can we buy the necessary materials?

  • Are key suppliers still willing to trade with us?

  • Do we have the employees and equipment needed?

  • Is the order profitable after all completion costs?

  • Can it be delivered within the promised period?

  • Is the deposit being used to complete that customer’s order, or merely to pay yesterday’s debts?

That last question is often the revealing one.

The danger of using new deposits to plug old holes

Imagine a home improvement company that takes a £6,000 deposit for new windows.

Its glass supplier has already placed it on stop. The company has no borrowing available, wages are overdue and the deposit is immediately used to pay historic PAYE.

The directors hope another order will provide the money to buy the first customer’s windows.

That is not really trading.

It is passing the financial hole from one customer to the next.

Compare that with a company which:

  • has the materials available;

  • can complete the work within two weeks;

  • will make a genuine profit on the order;

  • has a reliable cashflow showing that completion is properly funded.

Accepting that deposit may be entirely defensible.

The facts matter.

What happens if the company fails before delivery?

In most insolvencies, a customer who has paid in advance but received nothing becomes an unsecured creditor.

That means the customer will usually rank behind secured creditors and preferential creditors. In most cases, there will be little or no dividend available to the unsecured deposit creditor. The Law Commission has confirmed that consumers making ordinary prepayments generally have no special insolvency priority.

There can be exceptions.

A customer may have:

  • chargeback rights through a debit or credit card provider;

  • a claim under section 75 of the Consumer Credit Act;

  • protection through insurance;

  • beneficial ownership of specifically identified goods;

  • money held under a properly constituted trust.

Since January 2026, certain regulated consumer savings schemes must protect customer payments through insurance or trust arrangements. That is a specific regime and does not apply to ordinary deposits generally.

Would putting deposits in a separate account help?

Potentially.

Keeping deposits separate can demonstrate sensible financial control and reduce the risk that money needed to complete orders is swallowed by historic debts, such as the pre-existing overdraft or other creditors debts.

But simply opening another bank account and calling it “customer deposits” does not necessarily create a legal trust.

If the intention is to protect customer funds from the company’s general creditors, proper legal advice and carefully drafted terms may be required.

For some businesses, a more practical approach is to calculate the direct cost of completing each order and make sure that amount remains available.

When could directors face personal consequences?

Wrongful trading may arise where directors knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration, but failed to take appropriate steps to minimise creditor losses.

Fraudulent trading is more serious. It involves carrying on business with intent to defraud creditors or for another fraudulent purpose.

A dishonest or misleading statement made to persuade a customer to pay may also engage the Fraud Act 2006. A representation can be express or implied and may be false where it is untrue or misleading and the person making it knows that it may be so.

That does not mean every failed order is fraudulent.

Businesses fail. Plans go wrong. Unexpected events happen.

The concern arises where directors continue taking money while knowing that delivery is unlikely or impossible.

What should directors do now?

Review every outstanding deposit

Prepare a schedule showing:

  • customer name;

  • amount received;

  • order value;

  • work completed;

  • materials required;

  • completion cost;

  • expected completion date;

  • likely profit or loss.

Stop guessing

Prepare a short-term cashflow that includes the full cost of completing existing orders.

Consider limiting new deposits

Options may include:

  • smaller initial deposits;

  • stage payments linked to actual progress;

  • payment directly to key suppliers;

  • deposits held separately;

  • refusing new work that cannot be properly funded.

Be honest with customers

Do not promise delivery dates the company has no reasonable basis for meeting.

Record the decision

Board minutes should explain why continuing to accept deposits is considered to benefit creditors rather than worsen their position.

Take early advice

An insolvency practitioner can help assess whether orders should be completed, transferred, cancelled or stopped before the position deteriorates further.

Takeaway checklist

Before accepting another customer deposit, ask:

  • Can we actually complete the order?

  • Is the work profitable?

  • Are materials and labour available?

  • What will the deposit be spent on?

  • Are earlier customer orders already underfunded?

  • Does our cashflow include the full completion cost?

  • Are we being completely honest about delivery?

  • Have we recorded why accepting the deposit is reasonable?

  • Should we take professional advice before proceeding?

Final thought

Customer deposits can help finance perfectly legitimate work.

But they are not free working capital.

Every deposit comes with a promise attached.

When directors can no longer be reasonably confident that the promise will be kept, the answer is not to take more money and hope something turns up.

Stop.

Work out the true position.

Then decide what can genuinely be delivered.

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