The adjournment trap. Crown preference returns.

The adjournment trap. Crown preference returns.

Beware the Adjournment Trap

Our resident insolvency guru, Malcolm Niekirk, looks at one of the potential consequences of the return of crown preference.

A warning for insolvency practitioners

As you know, Crown Preference returns, on 1 December 2020.

In all appointments starting then, or later, HMRC may have priority over most other unsecured creditors.  They will be a secondary preferred creditor, for various taxes, including VAT, PAYE (including student loans), employee NIC and CIS deductions.  Those claims will rank ahead of those of most other unsecured creditors.

HMRC’s secondary preferential claims could be substantial.  They are not capped.  Nor are they limited in time (HMRC can go back for as long as the debt is valid).  Right now, many businesses have unpaid taxes; rather more so than in normal times.

So, what is the adjournment trap?

It’s this.

Suppose you have a virtual meeting convened for Tuesday 17 November, for creditors to vote on a CVA approval.

Now, suppose that you need to adjourn the meeting.  You can adjourn more than once, but the final adjournment can’t be more than 14 days from the original date.  You could end up with the CVA being approved on Tuesday 1 December 2020.

If there is a substantial HMRC claim, that could have a dramatic effect on the result for creditors.  The appointment is treated as starting on the date it is approved.  That will be 1 December (not the 17 November you originally intended).  As a result, HMRC’s claim for VAT, PAYE, NIC, etc will then be preferential.  (If the CVA is approved in November, HMRC will be an ordinary unsecured creditor.)  As a preferential creditor, HMRC will be entitled to a 100p dividend, before the ordinary unsecured creditors get anything.

Adjournments and crown preference

Probably you should present a revised estimated outcome statement, to reflect that change, at the adjourned meeting.  It may affect the way that creditors vote. 

You may decide, instead, to adjourn for less than the full 14 days, of course.  As we get further into November 2020, you will have fewer days available that escape the adjournment trap.

The implications for other appointments are similar, but less critical.  Adjourning a r6.14 virtual meeting beyond the end of November will result in different classes of creditors proving in the liquidation than would be the case with an earlier adjournment.  (Assuming that the winding up resolution – which is treated as setting the date for assessing preferential creditors – is synchronised with the creditors’ decision.)  That will affect dividends.

Adjournments and administrators

Perhaps you expect to be appointed as an administrator.  Filing another notice of intention to appoint administrators, to take the appointment date into December, could affect the composition of the body of creditors who fix your remuneration.

When does crown preference start? 

HMRC my be a preferential creditor in any insolvency that starts on 1 December 2020 or later.

Our ‘Coffee Break Briefing’ webinar on the reintroduction of Crown Preference was on 2 November 2020.  If you missed it, or if you’d like to see it again, the recording is available here and you can download the slides here.

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 crown preference or the adjournment trap, please do not hesitate to get in touch.

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