Many of your clients are suffering. Some businesses will not survive. The owners will need help to avoid bankruptcy. So now somethng completely different to help you advise them in Covid times. We must thank two contributors both licensed insolvency practitioners SPA director Paul Weber ACA FCCA FABRP (www.leighadams.co.uk) and Richard Rones FCA www.thorntonrones.co.uk
Paul has contributed part 1 regarding CVAs and Richard Rones part 2 regarding HMRC’s change of status to preferential . In our response to the consultation paper we rejected the proposal and have been ignored.
Part 1 Covid 19 Insolvency advice for your clients.
In September 2020 R3, the insolvency practitioners trade body, published a Standard Form Covid 19 CVA Proposal and accompanying Covid 19 Standard Conditions for Company Voluntary Arrangements which are intended for use by SME companies whose businesses have been affected by Covid 19 in these unprecedented times . They are intended to save time and costs, and therefore make CVAs more accessible to the SME market.
Company Voluntary Arrangements (“CVAs”) are a rescue process contained in the Insolvency Act 1986 (“Act”). They are the only consensual restructuring process contained in the Act. As a basic summary, CVAs enable debtor companies to propose a way forward with their unsecured creditors, and if 75% or more by value of those creditors agree, the solution can bind a dissenting 25%. As an additional protection, the CVA is not approved if more than half of the company’s unconnected creditors vote against it. (The terms of a proposal cannot bind a secured creditor unless it expressly agrees, and there are also protections for preferential creditors.) Usually the terms of a CVA allow the debtor company to pay a smaller sum in full and final satisfaction of its debts (a ‘debt composition’), but their terms can be virtually anything.
The fundamental change is that there will be a period where no contributions payable by the debtor company (a breathing space period).
In a recent case a company proposed a CVA with an initial 12 month breathing space period and then payments over 48 months to give it the opportunity to turn things round. The creditors meeting has yet taken place so the outcome is uncertain at present.
If you or your client company is considering whether or not a CVA is appropriate, you should speak to a licenced insolvency practitioner. There are a few who are SPA members.
The Standard Form is NOT a panacea. The introduction of the Standard Form is not intended to replace the professional advice and judgement of insolvency practitioners and lawyers who may be advising companies, but simply form part of their arsenal of available tools to assist their clients. At best, this should be considered a foundation upon which the appropriate CVA can be based
The Unintended Consequence of the Return of H M Revenue and Customs (“HMRC”) as a Preferential Creditor
– an explanation as to why Company Directors/Shareholders could lose their home just because of the changes to the status of HMRC as of 1st December 2020.
At present, HMRC are an unsecured creditor and therefore rank equally with all unsecured creditors, as you can see, just before shareholders but crucially after all charge holders. As of 1 December 2020, HMRC status will change so that for all deducted taxes (VAT, PAYE, EE’s NIC, CIS deductions and Student Loan deductions) they will rank as a Secondary Preferential Creditor.
The following should be noted:
- HMRC jump, overnight, to become in front of floating charge creditors, such as debentures for bank overdrafts, business loans, etc, that will no longer receive the full benefit floating charge assets . Up to 1 December 2020, a large proportion of floating charge assets go to the floating charge holder – book debts (where no factoring/invoice discounting), vehicles, plant & machinery, fixtures & fittings, stock, etc.
- HMRC preferential status will be for all deducted taxes not paid over existing on any date after 1 December 2020 irrespective of when they were incurred – therefore, it has a retrospective element to it.
- The amount of relevant HMRC debt is likely to be significant in any circumstance but particularly at the moment as most businesses will have deferred a quarter of VAT from early this year, will have the current quarter Vat and any other outstanding PAYE, EE’s NIC, CIS deductions or student loan amounts not paid over.
How will this impact my clients?
If there is a large HMRC liability, then any asset realisations from 1 December 2020 will not find its way down to the floating charge holder until HMRC are paid in full and thereafter the prescribed part is deducted (50% of the first £10,000 plus 20% of the balance).
Therefore, if the director/shareholder has personally guaranteed (or offered security) to a floating charge holder, this is often the case, they are much more likely after the 1 December 2020 to be asked to pay back a lender from personal asset.