The return of Crown Preference and the effect on restructuring and insolvency
For the first time in almost two decades, HMRC is now a preferential creditor. In the event a company becomes insolvent, HMRC will receive payments owed to it after secured creditors and before unsecured creditors for uncapped VAT, PAYE and National Insurance (NI).
Previously scrapped in 2002, the Crown Preference (not a reference to the popularity of a certain hit Netflix show) was intended to make the insolvency process fairer on unsecured creditors and ultimately, aid business recovery plans.
The current government predicts it will see £185 million generated through reintroducing the Crown Preference, aimed at putting money into the public purse. What effect will this have on restructuring and insolvency?
The impact of the Crown Preference on restructuring and recovery for businesses
With businesses still experiencing the aftershocks of the lockdown restrictions, many are still likely to need finance to recover.
Certain creditors, such as those with floating charges, are now likely to see reduced returns if a business fails. As such, businesses may now find it harder to access certain types of funding.
This could affect businesses who are not at the point of insolvency yet, but who recovery may have been a viable possibility for if given access to essential cashflow (or other required funding) from lenders.
Also, with many businesses having deferred VAT payments between the 20th of March 2020 and the 30th of June 2020, they are likely to have built up higher tax bills than normal.
This again could lead to an increased risk of insolvency, as HMRC could be less likely to be in favour of a recovery proposal.
The impact of the Crown Preference on CVAs
In 2017, 71% of respondents to a survey (s. 5) of 156 R3 members cited the most likely creditor to oppose a CVA was HMRC. These respondents were actively working on or in association with CVAs, and the survey aimed to better understand the reasons as to why CVAs failed, both at the proposal stage and after approval.
Even prior to the reintroduction of Crown Preference in 2020, it seems HMRC was one of the biggest roadblocks to putting in place a CVA.
The survey also found that 60% of respondents cited that formal CVA proposals failed to proceed largely due to a lack of support from HMRC. 40% cited unsecured creditors and 34% cited suppliers (such as landlords).
Will HMRC be even less incentivised to move forward with recovery plans now it will recoup more costs in the event of insolvency?
It may also mean HMRC will further crack down on ailing companies misusing CVAs as a restructuring agreement, as opposed to a solution for temporary financial difficulties.
Impact of Crown Preference on insolvency
In essence, the reintroduction of the Crown Preference seems to gear towards an increased risk of insolvency for certain businesses.
With this in mind, HMRC could benefit directly from the impact of the pandemic.
However, if more companies were going to go bust anyway in 2021, through losses that the 2020 pandemic has caused, does it not make sense that a higher percentage of the remuneration be added to the public purse?
Famously known for putting their friends in high places, into higher places, it seems (and this is admitted tentatively), the Conservatives are attempting to put public interests at heart.
We have yet to see whether the £185 million will materialise into the public realm, or whether we’ll simply see those further down the priority ladder absorb the highest losses.
To quote dystopian novelist Margaret Attwood, "Better never means better for everyone... It always means worse, for some”.
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