HM Revenue & Customs will become preferential creditors for priority taxes in insolvency cases from 1st December 2020. This change will apply for all new insolvencies from that date and priority taxes include VAT and PAYE income tax and employee national insurance contributions. Whilst this change applies only when a company fails, the impact is going to be felt by guarantors whether their company has failed or not.

For over 15 years, HMRC has not had a preferential claim in insolvencies, with their debt ranking with the other unsecured creditors. This meant that, apart from the amount set aside for the non preferential creditors, known as the prescribed part, the funds from floating charge assets have been available to pay secured creditors such as banks, who have a debenture. The floating charge assets will commonly include plant & machinery, stock, and trade debtors.

From 1st December 2020, where a company fails, the amounts realised for these assets will first be used to pay preferential creditors, including the claim of HMRC and this could have a significant impact on the amount a personal guarantor will have to pay. However, we expect that banks and other debenture holders will not be waiting for their clients to fail before taking steps to protect their position after 1st December2020.

Charge holders are now likely to take a far closer interest in the management information being provided to them monthly and assessing those clients who are showing signs of distress, especially where crown debts are increasing. We also expect them to examine the strength of the personal guarantees that they hold, to ensure that their lending is fully secured. They are likely to start asking guarantors to supply charges over personal assets to secure the guarantees. Due to the order that realisations are distributed in insolvencies, if an asset is secured by way of a fixed charge, it will not be caught by this change.

The most common method to achieve this is via invoice financing because the trade debtors are assigned to the lender. Whilst there may be a higher cost associated with such lending, compared to a bank overdraft or loan, it may be that this increased cost is worth paying to reduce the risk to the guarantor if the company were to fail.

If you have any questions please contact us on 01227 277667.