COVID-19: Crown Preference delayed until 1 December 2020 – a brief sigh of relief for floating charge holders and unsecured creditors alike.

It had been expected that the Finance Bill 2020 would bring with it the reintroduction of HMRC priority in insolvency. The anticipation was that in insolvencies commencing after 6 April 2020, HMRC would again benefit from a Crown preference, meaning that HMRC would become a preferential creditor for recovery of certain debts (including but not limited to VAT, PAYE, Employee NICs).

The decision to re-introduce Crown preference for HMRC, which had previously been abolished by the Enterprise Act 2002, gained a lot of negative commentary from professionals within the restructuring and insolvency sphere, with many feeling that such status would undermine the culture of rescue for businesses, and would lead to HMRC taking a harder line when being asked to support proposals to salvage businesses that were failing, but still worthwhile.

However, in the first budget delivered by Rishi Sunak, the Chancellor of the Exchequer, brought  some relief for those who may, very shortly, consider taking the benefit of, or granting the benefit of, a floating charge as the change in status has now been delayed until December 2020.

For now it seems that floating charges will continue to provide a useful source of funding to help businesses in rescue situations without the added risk of HMRC debts using up all available funds, something that will no doubt be a huge relief to businesses and lenders in the current COVID-19 climate.

Further, it also means that there is still hope in insolvencies of distributions being made to unsecured creditors on a pari passu basis, even when HMRC are (as they very often are) a majority creditor. Unfortunately, the need for rescue, or if past the point of no return, the hope of a dividend for unsecured creditors is something that we are likely to  see more regularly in the near future given the current impact of COVID-19 and the impact one small business’s insolvency can have on the solvency of both customers and suppliers alike.

Whilst it appears now that Crown preference for HMRC will return in December 2020, many professionals in the industry hope that eventually the Government will do a U-turn and scrap the idea completely.