Insights

What a difference a day makes

Prior to 2003 debts due to HMRC ranked above other creditors in insolvency proceedings. This is known as the Crown Preference.  The purpose of the Crown Preference is that it introduces a preferential claim in insolvency procedure which means that HMRC is paid prior to floating charge holders. The only other preferential claims in insolvency are claims of employees for things such as unpaid wages.

However, the Crown Preference that was abolished in 2003 was due to make its triumphant return in the 2020 budget announced by Chancellor, Rishi Sunak on 11 March. As expected, the Chancellor did announce the return of the Crown Preference in the 2020 budget but its reintroduction was delayed to the 1 December 2020.

The reintroduction of the Crown Preference brought with it concerns at it sees HMRC jumping ahead of secured lenders in the dividend queue. There was concern that this would introduce a new risk analysis that could change the way lenders assessed the value of a floating charge making it harder to secure borrowing.

However, 11 March heralded more than the UK’s budget for 2020 and it was on this day that the World Health Organisation declared a global pandemic arising from the spread of Covid-19.  Since 11 March we have seen an unprecedented change to our daily lives and the economy that we operate within.  

The Chancellor has announced various rescue packages to try and help keep businesses going, to try and secure job retention and to support the self-employed. In addition to these measures, aimed at keeping companies solvent, creditors may find it difficult to pursue insolvency proceedings due to a virtual shut down in the civil court, including the provision of Sheriff Officers’ services for all but urgent matters.

What does this general policy of support and recovery mean for the reintroduction of the Crown Preference?

The Government seek to encourage lending to businesses during the current climate in order to keep the economy ticking over but in any future insolvency position the Government may have the trump card of Crown Preference over commercial lenders.  One question in the minds of lenders has to be, what impact will the re-introduction of the Crown Preference have should the business limp beyond 1 December 2020. Whilst the Government wants to see an increase in lending, even guaranteeing certain loans, the Crown Preference could act as a deterrent to institutional lenders.

We expect that whilst the Government will be keen to start balancing the books as soon as reasonably practicable it will not want to be seen to be “jumping” the queue ahead of those lenders it has encouraged to provide borrowing during this crisis, even if they have guaranteed part of the loan. Therefore, it will be interesting to see if they reintroduce the Crown Preference as planned in December or if we should expect to see a further delay to allow the economy to stabilise before considering taking this step.

The Restructuring team at Stronachs will continue to monitor changes and provide updates.  We are on hand to support companies, directors and insolvency practitioners facing any of these issues.