From 1 December 2020 new changes to the priority rules in insolvency will have a real impact on the recoveries achieved by secured creditors on the insolvency of a debtor. These new rules give HMRC priority above floating charge holders and ordinary unsecured creditors in relation to tax collected by an insolvent company from third parties, such as VAT, PAYE income tax and NICs.
Both of these proposals will potentially eat into the proceeds recovered by an administrator or liquidator from a sale of a company’s assets which would otherwise be distributed to the company's secured lender.
In particular, the second of these reforms has the potential to have a significant impact, as HMRC is often one of the biggest, if not the biggest, creditor of an insolvent company. The proposal will partially reverse the 2003 abolition of the Crown preference under the Enterprise Act 2002, which relegated claims by HMRC from a preferential position to rank alongside ordinary unsecured creditors. It is expected to amount to approximately £185m in unpaid tax per year, the majority of which would have otherwise been paid to secured creditors.
In this note we examine how HMRC will be given priority and discuss ways in which lenders can take steps to protect themselves against a possible erosion of their recoveries from insolvent companies in the future.