Why you are at higher risk of experiencing insolvency

The Crown Preference – what is it?

As many companies face credit risk for the first time in this period of economic instability, it is worth noting that HM Revenue & Customs (HMRC) now ranks ahead of Floating Charge Lenders and Unsecured Creditors on the ladder of creditors when a UK company faces insolvency.

The order of preference in insolvencies since1 December 2020 is:
 

1. Secured Creditors (often fixed charges i.e. mortgages).
2. Insolvency costs.
3. Ordinary Preferential Creditors (primarily limited to certain employee claims).
4. Secondary Preferential Creditors (this will include certain HMRC taxes now - VAT, PAYE, Employee NI contributions, student loan contributions and contributions to the construction industry scheme).
5. Prescribed Part.
6. Floating Charge Holders (normally includes finance companies who may have some security on products such as invoice finance).
7. Unsecured Creditors (including HMRC for non-Secondary Preference debts).
8. Shareholders.

Is your business operating on credit terms?

This directly impacts all companies who trade on credit terms, ranging from sole traders, to SMEs, to large corporations. For Unsecured and Secured Creditors, floating charges will be impacted too, with the chances of recovering debts being much weaker for Unsecured Creditors in particular. This can result in an domino effect on insolvencies.

Crown Preference items  include VAT, PAYE, employees NI contributions, student loan collections and construction industry schemes and all of these will need to be paid before Unsecured Creditors, who are  at the bottom of the list for  insolvency payments .
 

An example?

Imagine Company A has been put into administration, with assets available for distribution of £18m (to be shared between outstanding creditors). Company B has a credit of £2m and is classified as an “Unsecured Creditor”. For simplicity purposes, Company B is the only Unsecured Creditor of Company A.