Many of us will recall the abolition of Crown preference back in June 2003 as part of a number of reforms designed to promote an enterprise culture in the UK and make insolvency processes fairer on unsecured creditors.  Well, as from tomorrow, Crown preference is back!

In summary, monies owed to the Crown, including uncapped VAT, PAYE and employee NICs, will rank as a second-tier preferential debt (behind employees). Most importantly, however, they will rank ahead of the claims of ordinary unsecured creditors, which will in the majority of cases include the claims of pension schemes.

This reform was ‘consulted’ on before COVID-19, and was generally accepted by the insolvency profession and bankers to be a bad idea. Only the Treasury appeared to think otherwise. 

An immediate ramification is that a number of insolvencies might already have happened or initiated, which otherwise might not have occurred, simply in an attempt to beat tomorrow’s deadline. The new measures could also influence the ability of companies to propose viable Company Voluntary Arrangements as all preferential debts will need to be paid ahead of ordinary unsecured creditors, which could increase the number of pre-pack insolvencies. The ability for insolvency practitioners to obtain agreement to relatively simple processes could also be impacted, leading to additional cost and delay in court applications as preferential creditors consent is needed in many instances requiring HMRC approval. It is hoped that the manpower is available to respond to such requests quickly and efficiently

The change will also have implications for businesses looking to secure money from floating charge holders, who often provide capital in return for security over assets such as stock, and who will now be paid after HMRC. The availability of such secured funding has often been crucial in rescuing businesses in financial distress, a remedy which may now be reduced, meaning that businesses that have a reasonable prospect of success under the current regime may well fail.

Given the relaxation in the payment of VAT and PAYE during COVID-19, amounts currently owed to HMRC could be significant, which could have a materially detrimental impact on returns to pension schemes/the PPF from insolvencies, which in turn could have ramifications for PPF funding and its levy.

Seeking the right professional advice at an early stage is crucial and 20-20 Trustees has significant experience and expertise in the distressed and restructuring arena to assist.