HMRC set to become a preferential creditor in insolvencies from December (again)

Keith Mindham Photogtraphy
Keith Mindham Photogtraphy Keith Mindham Photogtraphy

2020 is not the only thing that is coming to an end. After a period of ranking as an unsecured creditor in the insolvency of a company, HMRC will become a secondary preferential creditor from today.

In moving up the insolvency order of hierarchy, uncapped VAT, PAYE and employee national insurance contributions will now rank as a second tier preferential debt (behind employees), and after fixed charge holders, the expenses of insolvency practitioners, but before floating charge holders, company pension schemes, suppliers, and customers.

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. Importantly, the application of the legislation depends on the date on which the insolvency proceeding commences. Neither the date that tax debts were accrued, nor the date of any floating charge, are taken into account.

Businesses have endured an incredibly tough time over recent months and with severe restrictions once again in place, it could be argued that these changes could not be coming at a worse time. With the economic recovery yet to start, these changes could have a significant impact.

Notable changes include that floating charge holders, who provide investment in return for security over non-constant assets such as stock will now be paid after HMRC. This type of lending means that businesses retain flexibility to deal with these assets. It is possible that because of this change of legislation businesses will find it harder to obtain necessary forms of investment due to investors feeling that their money is less secure.

Investment secured by a floating charge has been crucial in rescuing some businesses from financial distress. Some believe that this update could reduce the availability of similar investment and ultimately result in businesses which could have succeeded, being wound up.

Now more so than ever lenders will need to take steps to protect themselves and this change should serve as a reminder to revisit origination and credit procedures aimed at ensuring that as much security value as possible falls subject to an assignment or fixed charge arrangement. By doing this, this would elevate the lender above HMRC in the statutory order of priority wherever possible.

Ultimately any changes to a lender’s practices need to be considered carefully in terms of the potential inconvenience and cost to both the lender and their borrowers in implementing these structures and also any associated risk that a lender could be perceived as uncompetitive in the wider market.

If the predictions about a wave of corporate insolvencies coming in the next number of months are correct – the true impact of these changes will be felt most acutely then.

Our prevailing hope is that the ability of insolvency practitioners to rescue companies in distress is not hindered at a time when it is going to be critical for the economic recovery.

:: Matthew Howse is partner (litigation and dispute management) at Eversheds Sutherland Belfast