CM June 2021 CM magazine

OPINION
CROWN
OF THORNS
Crown Preference is likely to be to the
detriment of many creditors.
IT was on December 1, last year that
HMRC formally reverted to secondary
preferential status in all insolvency
processes, ranking above floating
charge holders and unsecured creditors.
Put simply, it gives the Government
preferential treatment over most other creditors,
including banks, lenders, and suppliers in
insolvency procedures.
The rationale behind the decision have
been well rehearsed. The purpose is to swell
Government coffers and boost tax revenues. It was
a measure they last enjoyed back in 2002, a status
that was rescinded as part of the Enterprise Act of
the same year.
While the decision may look like a smart move
for Government, such changes to the order of
payments in an insolvency situation are not only
likely to be to the detriment of many creditors, but
they are also likely to drive changes in behaviour,
and not necessarily for the better.
Under the ‘old’ crown preference regime, only
tax debts of up to one year old had the benefit
of preferential status. With the ‘new’ regime
it’s different: all tax debt, regardless of age, has
preferential status, irrespective of the date that
the tax debts were incurred or the date of the
qualifying charge. This lack of a time bar means
both unsecured and floating charge creditors will
see their returns from insolvencies reduced. It
ultimately means less cash for businesses just at a
time when businesses really need cash to survive.
AUTHOR – Karen Savage FCICM
WINDING DOWN
As the Government support schemes begin to
wind down, and VAT repayment holidays draw
to a close, unsecured creditors will be last in the
queue for any cash left to distribute once the
HMRC has taken its cut. This has a number of
implications for businesses and the uncertainties
they face as we come out of COVID, particularly
for small businesses who may find access to
future funding even more of a challenge or more
expensive. Perhaps of even greater concern, it is
also possible that business payment terms may be
tightened by suppliers. The erosion of the floating
chargeholder’s value could lead to lenders being
less willing to advance new lending, or re-finance
existing debt. UK Finance has estimated that the
new rules will remove circa £1bn of lending that
might ordinarily be available to borrowers, and
this could seriously impact both the speed and
scale of the economic recovery.
There is a real concern that Crown Preference
is likely to impact access to and the cost of finance,
all at a time when businesses are going through
the toughest time in economic history.
Karen Savage FCICM is Chief Operating Officer
and Solicitor at Azzurro Associates.
This lack of a time bar means both unsecured and floating charge creditors
will see their returns from insolvencies reduced. It ultimately means less cash
for businesses just at a time when businesses really need cash to survive.
Advancing the credit profession / www.cicm.com /June 2021 / PAGE 16