Insolvency Update

Insolvency Update

From Joan Rice, Director of Corporate Recovery

Crown Preference returns

From 1 December 2020, HMRC will become a secondary preferential creditor in insolvencies (corporate and personal). 

It was initially thought that Northern Ireland would be excluded from the proposed reintroduction of Crown Preference, but the 2020 Budget confirmed that these changes are UK-wide.

From 1 December 2020 certain HMRC debts will fall within the categories of preferential debts, however, these debts will rank at the bottom of the ladder of these type of debts. All other preferential debts must be paid in full before HMRC are to receive a distribution under its new preferential status.

The provisions apply to debts in insolvency procedures commencing after 1 December 2020. Broadly, asset realisations are paid out to the following classes of creditor in the following order:

  • secured creditors with a fixed charge (after costs of realisation)
  • insolvency practitioners’ fees and expenses
  • preferential creditors
  • secondary preferential creditors
  • prescribed part creditors
  • secured creditors with a floating charge
  • non-preferential creditors
  • shareholders (for insolvent companies) or individual (for personal insolvency cases)

For insolvency procedures starting after 1 December 2020, certain sums due to HMRC but held by businesses when they enter formal insolvency rank as secondary preferential debts in the order of priority.

This means they are paid ahead of secured creditors holding a floating charge (for example banks) and ahead of unsecured creditors (for example suppliers).

Only certain specified HMRC debts are included - VAT, PAYE, NIC, student loan repayments and CIS deductions.

The main impact will be on lenders with floating charges who provide investment funds in return for security over the ‘floating’ assets of a business.  They will now rank after HMRC in the statutory order of priority. 

Hopefully this will not discourage lenders from advancing funds to support businesses which only have floating charge assets to offer as security. 

 

 

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