Crown Preference Returns?

In a return to the pre-Enterprise Act 2002 era, Chancellor Philip Hammond announced in the 2018 Autumn Budget that HM Revenue and Customs' (HMRC) preferential creditor status in insolvencies will be restored from 6 April 2020 onwards.

Read Upside - Autumn 2019

HMRC's preferential creditor status was abolished as part of the Enterprise Act 2002, a measure that was part of a number of reforms introduced by the then-Labor Government to encourage business rescue and to make the insolvency process fairer on unsecured creditors.

Under existing legislation for insolvency processes, HMRC's claims for unpaid taxes are unsecured and rank below floating charge holders and preferential creditors for the proceeds from the sale of floating charge assets such as stock, non-assigned debtors and plant and machinery.

This ranking has allowed lenders to businesses, in particular asset-based lenders (ABLs), to rely more readily on floating charge assets for security. This ultimately has enabled ABLs to offer higher levels of funding in support of a borrower's growth or turnaround (either via higher advance rates from invoice finance facilities, inventory facilities linked to changing stock levels and, in some cases, 'cash flow' loans). It has also afforded ABLs greater flexibility when a borrower needs additional support.

As part of the proposed legislative changes, the Chancellor announced that HMRC would revert to secondary preferential status in all insolvency processes commencing after 6 April 2020 for those taxes collected on its behalf, which are limited to:

Value Added Tax (VAT) Pay-as-you-earn tax (PAYE) Employee National Insurance Contributions (NICs) Construction Industry Scheme (CIS) Deductions The new legislation will not impact taxes collected directly from a company such as Employer NICs and Corporation Tax, which will remain as unsecured claims in insolvency processes.

These changes will deplete the security pool available to lenders that are reliant upon floating charges to collateralise their lending facilities. Where an ABL is particularly reliant upon floating charge assets, they may be forced to reduce or even withdraw existing facilities.

The move is likely to have a significant impact on the funds recovered from insolvency processes by both secured floating charge creditors and unsecured creditors and, by extension, business rescues and the availability of funding as well as the pricing of that funding.

The Government's consultation...