The return of crown preference in the Finance Act of 2020 has had significant implications on companies facing cash flow problems and potential insolvency. By giving priority to the payment of government debts and taxes in any formal insolvency, it is making it more difficult for struggling companies to secure financing from financiers and other creditors – they are less likely to lend money or offer credit if they are going to be further down the repayment queue when a business becomes insolvent. This, together with the fact that BBLs and CBILs are loans and not gifts, is making it harder for struggling businesses to access the funds they need to stay afloat, that is unless the directors give personal guarantees.
In one recent instance we saw a financier see its security disappear entirely and suffer a total loss because the ‘new’ preferential creditors, paye, nic and vat, exceeded the net realisations available under the floating charge. The change in preferential status cost the financier £0.2m. In that instance, the financier did not have the benefit of director guarantees, had they done so, it would have really hurt the directors personally, instead it hurt the financier.
It’s worth mentioning that crown preference is not a new concept and had been in place before the Enterprise Act of 2002, which abolished it. It’s important to note that the government claims that the reintroduction of crown preference is to ensure that taxes and government debts are paid more quickly and efficiently, but it’s likely to have a detrimental effect on companies, the directors who give personal guarantees, and the economy for a good while to come.