Crown preference set to return on 1 December 2020

Fieldfisher partner Stewart Perry considers the likely impact of the restoration of HMRC as a preferential creditor on insolvency.

 
This will rank uncapped VAT, PAYE and employee NICs as a second tier preferential debt (behind employees).

This was 'consulted' on before the Covid-19 pandemic, with views sought from the insolvency sector, IPs, bankers, lawyers and academics – all of whom agreed this was a bad idea. Only the Treasury said otherwise.

Even the government's own documents suggested bringing back Crown preference would deliver a mere £185 million benefit, while it has been estimated by UK Finance that its reintroduction will remove some £1 billion of floating charge finance from the pool of money available to companies.

The UK faces the economic hardship of Covid-19 (and the impending difficulties of Brexit), and although the date Crown preference comes into force was pushed back, the government has not indicated it will delay this further.

The likely consequences of the return of Crown preference on 1 December are as follows:
 

• The reintroduction of Crown preference will instantly cause a spike in the number of insolvencies, as other creditors seek to ensure a process is commenced before 1 December;

 

• It will also reduce the amount of money going to secured creditors from any insolvency process (something that is already being reflected in the amounts banks are willing to lend, and the cost of the same) and affect the ability for debtors to propose viable CVAs (given all preferential debts will need to be paid before ordinary unsecured creditors).

 

• The ability of office-holders to get relatively simple processes agreed will similarly be hamstrung, leading to more cost and delay in court applications (as preferential creditors' active consent is needed in a number of instances, and that will require HMRC to have the manpower to respond to requests).

The reintroduction of Crown preference was a bad idea when the economy was going well. It is an even worse decision now.

This article was authored by Stewart Perry, restructuring and insolvency partner at Fieldfisher. For more information about the return of Crown preference and how this might impact your business, please contact a member of Fieldfisher's restructuring and insolvency team.