The Return of the Crown Preference – A blog by Menzies

A long, long time ago…

No, I’m not going to break into a rendition of Don Maclean’s American Pie, although it is a karaoke classic and I am missing the days of friends cramming into a karaoke booth, drinks flowing and us crooning until the early hours thinking we were all excelling in entertaining our onlookers like Freddy Mercury.

It’s much more boring than that – it’s the Crown preference. The return of the Crown preference. (I know, Mark Morrison’s ‘Return of the Mack’ would be way more exciting right now!).

Yes, HM Revenue & Customs (“HMRC”) used to enjoy preferential status on some of the sums owing to them when a Company entered an insolvency. The Enterprise Act 2002 came along, and we saw this abolished and replaced with the Prescribed Part – a pot of money ring fenced for the unsecured creditors. This was a redistribution of the wealth as it meant HMRC’s debt became ‘unsecured’ like everyone else, but they still got a return from floating charge assets. At the same time, it was seen as fairer because all the other unsecured creditors also received a slice.

Fast forward to 1 December 2020 and HMRC now has its preferential status back. It sits as a secondary preferential creditor behind the employees for their arrears of wages and holiday pay. They are not secondary preferential creditors for all taxes owing though, only those that are considered as being held on ‘trust’ for HMRC, being predominately PAYE and VAT (or so their argument goes) and this only applies to insolvencies on or after 1 December 2020.

What’s the impact of this? What does it mean? Well, it’s not going to massively affect fixed charge creditors because they hopefully have their security to realise to pay any monies owing to them in the event that the customer goes bust.

It’s more the floating charge creditors that it impacts because they get paid after the first and secondary preferential creditors and the Prescribed Part also has to be deducted from floating charge realisations. Therefore, there is likely a smaller pot for them.

I hear you – who on earth are the floating charge creditors? Well, they will commonly be banks who have a charge over the floating charge assets of a company which are things like stock, the values of which can go up and down over time. If the banks are taking on more risk as a result of this returned Crown preference because they are likely to get back less in an insolvency, we may start to find the costs of obtaining credit or borrowing money, increase. That in turn may lead to cash flow concerns for some customers.

Unsecured creditors or the general trade and expense creditors are also going to find that the size of the pot that gets paid out to them is going to decrease, and they’ll get less of a return in an insolvency. Well, all except HMRC who are laughing all the way to the cake shop because they can still benefit from the Prescribed Part, as well as now having their preferential status, proving that you can have your cake and eat it as it were.

For credit managers, it highlights again the need for risk profiling and knowing your customer, having your finger on the pulse and keeping up to date with the issues impacting business.

We recently discussed the Crown Preference in our first podcast with the CICM – amongst other topics such as the current insolvency landscape and how credit managers can ride the post-lockdown wave. To listen to the recording, please click here.

If you have any questions in relation to this blog or our podcast, please email Bethan Evans, Head of Menzies Creditor Services at bevans@menzies.co.uk or call 02920 447 512. Alternatively, to read more on the services that Menzies offers to creditors, please click here.