On 1 December 2020 HMRC regained its status as a preferential creditor in insolvency proceedings (albeit a secondary ranking preference for PAYE and VAT debt after employees’ unpaid holiday and wages).This reduced the amount available for unsecured creditors through dividend payments and went against the principles of the Enterprise Act and the rescue culture. And whilst this change has had an impact across all insolvency proceedings, nowhere is it felt more than in a company voluntary arrangement (“CVA”).
In a CVA preferential creditors’ rights cannot be varied without their consent. Previously this was a formality for most CVAs with the only preferential creditors being the company’s employees, who more often than not would be key to any future success of the business. However, with HMRC being reinstated as a preferential creditor this will mean that they will have to be paid in full for the CVA to be a success, giving HMRC an effective veto over the approval of the CVA.
When a company experiences financial difficulty, HMRC tend to be one of the first creditors whose debt builds up due to non-payment. As a result of government support over the past 17 months through VAT and PAYE deferrals, crown debt is likely to have increased. As HMRC now gets the first bite, will there be enough left for ordinary creditors for it to be worth their while to support a CVA?
Would you support a proposal where you were not paid for the first year of a CVA so that HMRC can be paid in priority? Companies may need to turn to other rescue procedures. One such route might be the widely talked about pre-pack administration route which, whilst often criticised, can preserve the business and its inherent value for the benefit of the creditors, even if it does not save the company.
This does not mean that a CVA can never be right for a business, but the change in status of HMRC means that CVA advice will need to be sought much earlier if both the business and the company are to be rescued.