Restoration of Crown Preference and the SME landscape

Although the restoration of Crown Preference had been expected for some time, its impact will be felt way beyond its December 1st reinstatement.

Restoration of Crown Preference and the SME landscape

Ian Bath (pictured) is corporate sales director at Nucleus Commercial Finance

Although the restoration of Crown Preference had been expected for some time, its impact will be felt way beyond its December 1st reinstatement.

Since then, preferential status for certain HMRC debts in insolvencies was reintroduced, following its removal eight years ago.

While there has been some speculation that the government may scrap or even delay its reintroduction even further in the wake of the COVID-19 pandemic, this didn’t happen.

And the proposals had been widely criticised by both the restructuring and insolvency industry long before the outbreak began.

Impact on asset-based lenders

Under the new rules, lenders need to be aware that an insolvent company’s unpaid Priority Taxes could have a detrimental impact on their recoveries.

Such liabilities will now be paid to HMRC from the proceeds of floating charge assets, before amounts owing to the floating charge holder itself.

This will ultimately reduce the amounts that can be recovered by floating charge holders and unsecured creditors.

As a result, a number of asset based lenders have already been looking to exit, or scale back, existing inventory facilities.

The reduction in facilities has also been driven by the need to increase reserves to cover VAT and PAYE payments which will now receive preferential treatment.

Combined, these impacts driven by the reintroduction of Crown Preference are reducing the options for businesses seeking funding, at a time when many are looking for additional finance.

Looking ahead, asset-based lenders will be considering how they need to assess valuations differently.

At Nucleus Commercial Finance, we remain very much open for business across all asset classes.

We have always taken a holistic approach when looking at asset pools and will continue to do so.

This enables us to find flexible solutions for our clients that suit their unique needs.

SMEs feel the squeeze

It is not just lenders who are feeling the squeeze. Businesses will start to feel the impact of the changes too.

The increased risk to asset-based lenders means that some lenders will be reducing how much they are willing to lend.

This will mean less cash for businesses at a time when they desperately need it, to get back on their feet following a second national lockdown.

In addition to this, businesses that have delayed payments to HMRC and sought Time to Pay arrangements to preserve cash, are likely to find these amounts being deducted from their inventory and other floating charge borrowings.

From a borrower perspective, they need to understand the impact on funding and factor this into their forecasts.

If they have provided their lenders with personal guarantees then there is likely to be a greater reliance on these than previously, so they should be mindful of this.

It’s important for business owners to remember that personal guarantee insurance is available and I can see the demand for this increasing.

From now on lenders will need to be closer to the outstanding Crown position, so borrowers should be ready for increased reporting requirements and more regular audits.

Looking ahead

While the return of Crown Preference is an unwelcome move, we should not discount the possibility of a change in the rules again as the implications on the availability of funding, and the reduced options available to the turnaround and insolvency community, come to the fore.

An inevitable consequence of this move is a greater emphasis on lending against fixed charge security and personal guarantees, which the ABL community has been delivering for years.

With emergency lending schemes soon coming to an end, many businesses will be looking for secured longer-term lending.

This is where asset based lending will play a vital role, enabling businesses to unlock additional value from the assets they already own, providing them with certainty in times of great uncertainty.