On 22 July 2020, the Finance Bill 2019-21 received Royal Assent, meaning that from 1st December 2020, HMRC will once again rank as a secondary preferential creditor in insolvencies.
The return of the “Crown Preference” will come into effect notwithstanding the widespread opposition to its reintroduction and is entirely at odds with the recent measures introduced by the Government aimed at promoting business rescue, such as the Corporate Insolvency & Governance Act 2020.
What will change?
The reintroduction of the ‘Crown Preference’ means that, in the event of an insolvency, HMRC will rank behind fixed charge olders and ordinary preferential creditors but ahead of floating charge holders and unsecured creditors (such as the company's suppliers or customers - including SMEs and some employee claims).
HMRC’s ‘elevated’ claim status will relate to PAYE, employee NICs, and VAT and their claim is neither capped by amount or time.
The quantum of these claims is often significant and with the additional COVID-19 support, VAT deferrals and the recent increase in the Prescribed Part, it is likely to greatly reduce the monies available for distribution to both floating charge holders and unsecured creditors in insolvencies.
What is the impact?
A large proportion of lending in the UK is currently secured by way of floating charge and as such a primary effect of the Crown Preference is to change the recovery profile for floating charge holders.
With lenders facing the possibility of seeing reduced returns if a company becomes insolvent, they may be less willing to lend and this is a blow to companies already in financial distress but who may be able to rescue their business if given access to funding.
It is likely that there will be an increased focus from lenders to ensure their security can be characterised as a fixed rather than a floating charge or requiring personal guarantees.
At a time when the business community is still experiencing the aftershocks of the Covid-19 pandemic, when access to finance is more crucial than ever, the re-introduction of this preference is likely to hamper the rescue efforts of many viable companies.
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