The Finance Bill 2020 has received Royal Assent, as of 22 July 2020, and became the Finance Act 2020, reintroducing heavily contested measure of restoring HM Revenue and Customs (HMRC) from 1 December 2020, and moving them up the creditor hierarchy as the secondary preferential creditor on insolvency (Crown Preference).
The Act brings in major changes in the law for corporate lenders
Crown Preference will therefore be reintroduced from 1 December 2020 for the distribution of assets upon the insolvency of a company. Its reintroduction will affect recoveries under both new and existing floating charges.
What is Crown Preference?
‘Crown Preference’ is the expression used to label the preference that HMRC had in the distribution of assets in insolvency before 2002. Crown Preference was eradicated by the Enterprise Act 2002, but Crown Preference is to be re-established this year (despite it being contested by most of the insolvency profession).
This means that the reintroduction allows HMRC the preferential right to be paid, ahead of floating charge holders and unsecured credits, payments due to VAT, PAYE (includes student loan repayments) and employee NI contributions. These tax debts will be preferential if the insolvency is commenced after 1 December 2020. HMRC will remain an unsecured creditor for taxes that it collect directly, including corporation tax and employer national insurance contributions.
What happens at the moment?
The current position for insolvency is that the charges over the fixed assets are repaid first to fixed charge holders. Then the left-over assets tend to be distributed amongst remaining creditors in accordance of the following hierarchy.
- Insolvency costs
- Preferential creditors
- Prescribed part
- Floating charge
- Unsecured creditors
HMRC are (presently) classed as a regular unsecured creditor, meaning that they rank below insolvency costs, preferential creditors and floating charge holders.
Changes to Crown Preference as of 1 December 2020
For some tax liabilities, HMRC will be moved up the hierarchy. The change means that HMRC will no longer rank as an unsecured creditor, but will rank below preferential creditors and above the prescribed part. This means that they will have preference before floating charge holders and all unsecured creditors. HMRC’s claim to these tax liabilities will not be subject to a cap either.
This preference only applies to certain tax liabilities, specifically:
- Student Loan Repayments
- Construction Industry Scheme deductions
- Employee National Insurance contributions
How will this affect companies and lenders?
This modification in legislation will make it more problematic for lenders to make retrievals in insolvencies.
The Act does not place a cap on the amount recoverable by HMRC on these tax liabilities and the result is that an unknown and uncapped proportion of the insolvency assets will be paid to HMRC before floating charge holders and unsecured creditors get paid at all.
Unavoidably, this will have an impact on others. The biggest one being, lenders will face superior risk when lending to companies. Therefore, it is likely that lenders will increase the costs involved in lending and companies will be more hesitant to borrow (particularly where the directors are needed to offer personal guarantees). It is expected that if companies are dejected from taking out finance, this will suppress the progress of these businesses.
Contact JMR Solicitors for legal advice Crown Preference
If you need advice to realise what this change means for your business (either as a lender, borrower or director who has given a personal guarantee to a lender), please contact JMR Solicitors’ corporate insolvency team on 0161 491 3933 or email email@example.com