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Priority in Insolvency Proceedings – An update

Priority in Insolvency Proceedings – An update

On 3 March 2020, Parliament made an order to increase the prescribed part, to come into force on 6 April 2020.

Further, the government has confirmed that the commencement of measures which provide for HMRC having priority in certain debts, will be delayed until 1 December 2020.

Background of priority

By way of background, realisations of assets of an insolvent company are applied to the claims sought by creditors in a specified order of priority. Generally, secured creditors by way of fixed charge will rank highest in the order and generally be entitled to receive the value realised from the secured assets.

The order of priority is listed below:

  1. Secured creditors with fixed charges
  2. Expenses of the insolvent estate
  3. Preferential creditors
  4. Holders of floating charges
  5. Unsecured creditors
  6. Shareholders

Increase in prescribed part

The prescribed part in insolvency proceedings was introduced in 2003. The purpose of the prescribed part was to allow for a portion of the asset realisations to be made available to discharge part of the claims of unsecured creditors on the insolvency of a company.

The cap applied to the prescribed part is to increase from £600,000 to £800,000. Unsecured creditors may therefore benefit from an increased amount being available for distribution to them under the prescribed part.

The increased limit does not apply where the company’s net property is available to be distributed to the holder of a first-ranking floating charge created before 6 April 2020.

HMRC’s priority

Back in March 2019, we set out the relevant details regarding the government’s intention for HMRC to return as a preferential creditor in insolvency cases. This article can be found here (https://www.actons.co.uk/latest/2019/03/hmrc-consultation-on-becoming-secondary-preferential-creditor/).

The proposal set out previously, would have affected insolvencies commencing on and after 6 April 2020. However, the government budget, delivered by Chancellor of the Exchequer, Rishi Sunak on 11 March 2020 confirmed the government’s plans to reinstate  HMRC as a preferential creditor from December 2020.

 

It will certainly be worth keeping an eye on the above measures and whether additional measures may be introduced, following the fallout of the Coronavirus (COVID-19) pandemic.

 

Posted on April 22, 2020

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