When companies go bust, who gets what – Part 2

In November 2018, my article “When companies go bust, who gets what?” went live on the AAB website. As with all these things, it had been drafted shortly before publication date, and most crucially before the Chancellor’s budget on 29 October – when he dropped a bit of a bombshell that no-one in the insolvency industry saw coming.

Prior to September 2003, HM Revenue & Customs (‘HMRC’) were treated as a preferential creditor for certain aspects of the unpaid taxes due to them at the time that a company entered an insolvency process. They lost that preferential ranking at that time, with part of the rationale being the introduction of a “prescribed part” which meant that ordinary unsecured creditors (basically everyone due money except for those with a security, or employees with regard to the first £800 of wages and holiday pay and certain unpaid pension contributions) would get some of the money that otherwise would go to a certain type of secured creditor known as floating charge holders.

The Chancellor announced that it was intended that HMRC would be treated as a preferential creditor again for all insolvencies which commence after 6 April 2020. The taxes that will be treated as preferential will be those taxes that a company collects from employees and customers but hasn’t passed on to HMRC, such as VAT, PAYE and CIS deductions. Taxes levied directly on a company, such as Corporation Tax, will remain an ordinary unsecured creditor.

HMRC are currently consulting on this proposal, so this change is not set in stone, but clearly it is the intention of the current government to introduce this change, with a view to getting a larger share of the funds that insolvency practitioners pay out to creditors. But as with all things in insolvency, when clearly there aren’t enough funds to go around, for anyone to get more money, someone else has to get less money – so who will lose out?

HMRC suggest that the main parties to lose out will be floating charge holders (usually the bank that provided funding to the insolvent company). I have my doubts on that, as for many small businesses, the banks look to the company’s directors to provide a personal guarantee for any losses the bank suffers.

I can understand that many people may not have a huge amount of sympathy for those directors, but putting further pressure on such people, potentially forcing them into personal bankruptcy, is not a positive step for an economy that is supposed to be supportive of allowing people to pursue entrepreneurial opportunities. Add into the mix the increasingly clear connection between personal debt and mental health issues, and I worry that this measure will have unintended but undoubtedly negative effects.

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