Crown Preference

At the commencement of 2022 we were appointed as liquidators of a relatively large company, which had incurred a substantial amount of trade debt.?

?The company did however still have a large amount of cash at bank, together with a sizable debtor book, which at the outset of the case gave the unsecured trade creditors false of hope of perhaps receiving a dividend.? However, these hopes were based on their knowledge of the Company’s recently filed accounts and not the Statement of Affairs, which had not been made available at the time.?

?In reality, notwithstanding the asset position, these was no prospect of a dividend being paid to unsecured creditors on this particular case due to the company’s significant liabilities to HM Revenue and Customs (“HMRC”).??

?In my recent experience, most company directors and creditors are still not aware of the re-introduction of HMRC as a secondary preferential creditor, which came first came to light in the 2018 autumn budget and took effect from 1 December 2020.???

?What this essentially means is that for any insolvency commencing on or after 1 December 2020, HMRC will be a secondary preferential creditor in respect of VAT, PAYE, employee National Insurance Contributions, Construction Industry Scheme deductions and student loan repayments.???

?Employees however, still rank before HMRC in respect of any arrears of wages or holiday pay due.?

?In 2002 the Enterprise Act abolished HMRC’s preferential status and as such it will have been almost two decades since some unsecured creditors would have been presented with a Statement of Affairs outlining the weakened position of their claim in light of this change in legislation.?

?HMRC’s claim in this particular matter will therefore be paid in priority to any floating charge holders and unsecured creditors.

Any other tax debts which a company owes to HMRC on its own account, such as corporation tax, will still rank as ordinary unsecured claims.?

I have also had some difficult conversations with company directors recently in circumstances where, prior to taking insolvency advice, they initially thought that a personally guaranteed debt would be paid, but ultimately won't be due to HMRC’s strengthened position.??

Finally, I have noticed that creditor engagement has reduced following this change in legislation and that it has become increasingly difficult for a decision procedure or resolution to be passed when the only party benefitting from the procedure is HMRC.??