Page 7 - BOSS Today Issue 51

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CHANGING THE PECKING ORDER

HMRC HAS REGAINED PREFERENTIAL CREDITOR STATUS:

WHAT DOES IT MEAN FOR BORROWERS AND FOR TRADE DEBTS?

s part of the Government’s measures Insurance contributions. HMRC remains
Ato support struggling businesses during an ordinary unsecured creditor for unpaid
the COVID-19 crisis, a number of changes Corporation Tax and employer National into insolvency. HMRC can be one of the
were made to Insolvency legislation. Insurance contributions. largest creditors in any insolvency, and
Among these were the suspension of parts its move up the rankings of who gets paid
of the Insolvency Act 1986, including a Why has the Government decided to first will inevitably result in less funds to
moratorium for distressed companies make this change? be shared amongst unsecured creditors.
contained in The Corporate Insolvency and The government’s policy briefing paper If you extend credit to customers, it
Governance Act 2020. explains that ‘Where a company or may be a good idea to reassess credit
Originally planned to prevent the use of individual becomes insolvent, the taxes limits and keep a watchful eye on
Winding Up Petitions until 31 December paid by employees and customers, which customers’ credit ratings.
2020, the moratorium has been extended the insolvent business was temporarily
until 31 March 2021. It is expected that a holding, do not always go to funding How will this affect our ability
flood of petitions will be presented when public services as intended. In such cases, to borrow?
the temporary restrictions are lifted. they often go towards paying off debts The increased risk to lenders who have
If you are an unsecured Trade Creditor owed to other creditors.’ previously relied on floating charges
of a company going into insolvency, as security may see those lenders
you may be affected by another change What will be the new order of priority? reducing the amount of funding they are
contained in The Finance Act 2020, which prepared to make available without some
partially restores HMRC as a preferential From 1 December 2020, creditors will be additional security. Lenders may want
creditor with effect from 1 December paid in the following order: a fixed charge over assets or property,
2020. n Secured creditors with a fixed charge and may seek additional security in the
(after costs of realisation) form of parent company or personal
What is changing? n Insolvency practitioners’ fees and guarantees.
Before 2002, HMRC enjoyed preferential expenses Floating charge funding is a frequently-
status as a creditor when a business n Ordinary preferential creditors used tool for businesses seeking
became insolvent. This meant that they (employees) temporary or rescue finance, and with
were paid after creditors holding fixed n Secondary preferential creditors lenders already concerned about the
charges as security, but before floating (HMRC for some types of taxes and double negative impacts of COVID-19 and
charge holders and unsecured creditors. the Financial Services Compensation Brexit on the economy, this restoration
This preferential status was removed Scheme) of the Crown Preference, even though
by the Enterprise Act 2002, leaving the n Prescribed part creditors partial, may have a detrimental impact on
HMRC as an ordinary unsecured creditor. n Secured creditors with a floating the availability of funding to businesses.
However, from 1 December 2020, charge
HMRC has moved back up the rankings n Non-preferential creditors (unsecured
that determine which creditors get paid creditors)
first in respect of some types of taxes. n Shareholders (for insolvent companies)
This means that HMRC will rank ahead For more information, please contact
of floating charge holders and unsecured How will this affect trade creditors? Nicola Langley, Head of Legal &
creditors in respect of unpaid VAT, PAYE Most trade creditors will have no security Commercial Solicitor, at
income tax and Employees’ National for unpaid debts when a customer goes nicola.langley@bpif.org.uk

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