Are CVAs still viable with crown preference?

Frettens' resident Insolvency Guru, Malcolm Niekirk, looks at whether CVAs are still viable now that crown preference has been reinstated.

Are CVAs still viable with crown preference?

From the beginning of this month – December 2020 – HMRC will once more rank as a preferential creditor.  The claims for which they will claim preference include:

• VAT
• PAYE (including student loan repayments)
• NIC (employee contributions)
• Construction industry scheme deductions

Those claims are not limited by time – they can include unpaid debts going back for years.  Nor are they capped by amount.

HMRC as a preferrential creditor

Their priority is set in s4(4) Insolvency Act 1986.  That insists that preferential debts must be paid with priority to other unsecured debts.  It is possible to change that in the CVA proposal, but (when they are the creditor affected) HMRC has a veto.

HMRC have been a preferential creditor under earlier versions of the insolvency legislation.  They then regarded s4(4) as requiring CVA proposals to pay their preferential claims before paying anything to ordinary unsecured creditors.  It was very uncommon for them to waive that requirement.

CVAs since the reinstatement of crown preference

Early experience with CVAs in December suggests that, as expected, HMRC seems to be reverting to that position.

This means now that CVA proposals must identify the extent to which HMRC is expected to be preferential.  The proposals must envisage payment in full of that preferential claim.  They must calculate the prospective dividend offered to creditors on the basis of the funds available after payment of HMRC’s claim.

One likely result, of course, is that the lower dividends offered to ordinary unsecured creditors will mean that fewer prospective CVAs are viable.

In cases where there is a significant debt to HMRC, directors are also likely to have to consider their risk of personal liability under schedule 13 to the Finance Act 2020.

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