Directors Salaries – Doing it Right if You Have Financial IssuesPosted: Jul 7, 2025

How directors pay themselves can suddenly become very important if the business is facing financial issues.

You may have seen the reports in the news recently about the insolvency of Prax Linsey oil refinery in North Lincolnshire. Sadly, it could mean a lot of job losses and will impact the local area very badly. The press is also reporting that there is some speculation (and I want to be clear that at this stage it is only speculation) at government level about director mismanagement. Some of the questions being asked are about alleged salary and dividends paid to the Directors totalling over $15million prior to the insolvency.

While it is rarely on this scale, we are sometimes asked about directors pay when we are presenting or speaking at events, and it often comes up during the initial consultation with businesses looking at insolvency. So, let’s start with a reminder of what insolvency means and how that relates to salaries before we move on to what responsible directors should be doing about it.  

Insolvency and pay

Put simply, insolvency means a company cannot pay its debts as they fall due, or its liabilities outweigh its assets. Salaries for all employees are therefore part of the debts we consider during an insolvency. As a director, you should know your numbers and, if the money is not there to pay your debts, take appropriate action. Clearly, this is the best option, but also, if you don’t, you are potentially opening yourself up to allegations of wrongful trading.

So, where does that leave you when it comes to paying yourself?

It’s OK to pay yourself, as long as you are sensible about it

It’s permissible to pay yourself at least minimum wage. In fact, it could be a prudent thing to do. Many directors with a struggling business will stop taking a salary as both a financial measure and often because they feel a sort of ‘my business, my burden’ guilt. That’s understandable, but in reality, it’s actually not a very good idea, and it can backfire because it may be seen as a sign you knew the position the company was in and didn’t act. Paying a modest, consistent salary is a better option.

Beware of the director’s loan mistake

Many directors turn to loan accounts to fund personal needs. It seems to make an amount of sense, but if the company later enters insolvency, that loan will become a personal debt you owe to be paid back. It is a potential flashpoint where your personal finances become entangled with your business ones. If you’re already struggling financially, adding director loans into the mix can worsen your personal risk, and possibly trigger professional scrutiny if the loan doesn’t stack up as a sensible decision.

Dividends can be a big problem

Dividends are often used for tax efficiency by most company directors. However, we sometimes see businesses where the directors have fallen into the habit of treating dividends as if they were a salary.

To be clear on this, you can only take dividends where real, tangible, distributable profit exists.

This means the company must have a surplus after all liabilities. Paying dividends without appropriate profits and then slipping into insolvency is not acceptable practice and will set the alarm bells ringing during and insolvency process. In practical terms, if the directors of any business in financial distress have drawn excessive dividends will come under scrutiny. It may be that those payments will need to be returned, and it could raise a legal question about conduct.

Preferential payments are a big ‘no’

It isn’t unusual for a company to have links with other businesses run by the directors, their partners, family members, friends and other linked people. If you are facing insolvency, you will naturally want to minimise the impact on these people. You need to resist the temptation to pay them any differently than anyone else. Paying yourself a disproportionate amount or repaying linked parties while others remain unpaid is both improper and potentially illegal.

Get formal with your own salary

If you don’t have one, you may want to give yourself a contract of employment. I know, it sounds strange when you are a director to have an employment contract, but the truth is that you are an employee. As such, a written employment contract gives legal clarity over salary, duties, and rights. In insolvency, that contract will help support the argument that your salary payments were legitimate and grounded in agreement. It may also help with a redundancy claim, but that is a whole other discussion. See here for more details.

Make the right decisions

The closure of the Prax Linsey oil refinery, regardless of any questions being raised at Westminster level about the conduct of the directors, offers an important reminder that handling directors remuneration carefully is vital. If finances are a problem, you should look to pay modestly, avoid loans, measure dividends rigorously, document everything, and use an employment contract as a minimum. By prioritising transparency, fairness, and informed decision-making, you not only protect your company but also shield yourself from personal consequences.

If you have any questions or you are worried about insolvency, as always, get in touch and let’s see if we can help.