Taking Customer Deposits When a Company Is Struggling

Does this sound familiar?

The company needs new customer money to complete older work. You are unsure whether every new order can be fulfilled. A large deposit would ease today's cash pressure, but the money may be needed immediately for wages, tax or suppliers.

The short answer

Financial difficulty does not automatically prohibit a company from accepting new business. The central question is whether directors have a reasonable, evidence-based expectation that the company can fulfil the new commitment.

Continuing to take deposits when there is no reasonable basis for delivery can increase customer losses and expose directors to scrutiny. The answer depends on the company's prospects, cash flow, funding, capacity and the terms of each order.

What may be urgent

Test whether each material order can be delivered under a realistic downside forecast
Separate customer deposits from general optimism about future sales
Record the information and reasoning behind important decisions
Review whether continued trading is worsening creditors' position
Obtain advice promptly if insolvency appears unavoidable

What to avoid

Using new deposits to fill an unexplained historic cash gap
Promising delivery dates that operations cannot support
Taking new credit without a reasonable repayment basis
Preferring connected parties or moving assets without advice
Relying on an unsigned funding proposal as available cash

Information to gather

Order book, delivery dates and cancellation rights
Costs required to fulfil each material order
Stock, subcontractor and staffing availability
A rolling short-term cash-flow forecast
Funding terms and evidence of committed facilities
Board decisions and customer communications

Options that may be considered

Directors may decide to accept only orders that are clearly deliverable, change payment or fulfilment terms transparently, seek funding, reduce trading, negotiate with creditors, pursue a rescue procedure, or stop taking new commitments. The appropriate route requires case-specific advice.

What happens next?

Review trading while insolvent, directors' duties, or complete the confidential assessment.

Authoritative sources

This guide provides general information for directors of companies registered in England and Wales. It is not legal, financial, accounting or insolvency advice.