On 1 December 2020 a change in the law means that the way in which some liabilities due to H M Revenue & Customs (“HMRC”) are dealt with in an insolvency situation will change. As things stand at the moment, monies due to HMRC are dealt with in exactly the same way as monies due to trade suppliers, landlords, utility companies and so on. However, on 1 December 2020 this changes and some monies due to HMRC will become “preferential” and will therefore come before other creditors.
On the face of it, this might not seem too important, but it could really impact on both your company and any personal guarantees you may have given to say banks or other lenders.
What are the implications for directors that have given personal guarantees?
The issue is that many banks and other lenders rely on what is called a debenture, which creates fixed and floating charges, to give them security over the assets of a company. In essence, this means that in a formal insolvency, such as liquidation or administration, monies realised from the sale of assets, or the collection of book debts, go to repay any sums due to the bank or other lender. However, where the assets are covered by a floating charge (usually plant, machinery, vehicles, stock, cash balances, book debts which are not subject to a factoring agreement), then any monies realised from those assets MUST first go to pay any preferential creditors.
At the moment, the only preferential creditors are certain employee claims which are usually fairly modest, so the bank or lender gets most (c80%) of the money realised after payment of the modest preferential claims and after providing a percentage of the monies to deal with the claims of all other creditors. This is known as the Prescribed Part, it is set down in statute and usually equates to somewhere just over 20% of the monies realised.
However, after 1 December 2020, the claims of the preferential creditors might be significantly higher due to monies due to HMRC. This would therefore mean that the monies paid to the bank or other lender might be significantly reduced. If this results in a shortfall to the bank or lender which you as a director have personally guaranteed, this could be a MAJOR concern. It might also result in significant concerns for your bank or other lender!
Obviously, not all companies are the same and each companies' individual circumstances may vary. However, this could be quite a problem for some companies and directors.
Categories: Personal Guarantee What Happens In Insolvency?