Are CVAs still viable with crown preference?
From the beginning of this month – December 2020 – HMRC will once more rank as a preferential creditor. The claims for which they will claim preference include:
- PAYE (including student loan repayments)
- NIC (employee contributions)
- Construction industry scheme deductions
Those claims are not limited by time – they can include unpaid debts going back for years. Nor are they capped by amount.
HMRC as a preferrential creditor
Their priority is set in s4(4) Insolvency Act 1986. That insists that preferential debts must be paid with priority to other unsecured debts. It is possible to change that in the CVA proposal, but (when they are the creditor affected) HMRC has a veto.
HMRC have been a preferential creditor under earlier versions of the insolvency legislation. They then regarded s4(4) as requiring CVA proposals to pay their preferential claims before paying anything to ordinary unsecured creditors. It was very uncommon for them to waive that requirement.
CVAs since the reinstatement of crown preference
Early experience with CVAs in December suggests that, as expected, HMRC seems to be reverting to that position.
This means now that CVA proposals must identify the extent to which HMRC is expected to be preferential. The proposals must envisage payment in full of that preferential claim. They must calculate the prospective dividend offered to creditors on the basis of the funds available after payment of HMRC’s claim.
One likely result, of course, is that the lower dividends offered to ordinary unsecured creditors will mean that fewer prospective CVAs are viable.
In cases where there is a significant debt to HMRC, directors are also likely to have to consider their risk of personal liability under schedule 13 to the Finance Act 2020.
Insolvency & Restructuring Solicitors near London, in Hampshire & Dorset, near Southampton and in Bournemouth, Poole, Christchurch and The New Forest
We hope you found this article useful. If you are an insolvency practitioner who would like to discuss the content of this article, please do not hesitate to get in touch.
If you are would like to stay up to date with developments in insolvency law, you can register for our updates from Malcolm, our resident insolvency guru. Just fill in the pop-up on this page or get in touch, and you will be the first to know about any articles, webinars, videos, briefings or events.