In our recent blog we likened HMRC to a salmon, leaping up the waterfall of distributions on insolvency. At a risk of mixing our similes and metaphors, the key concern from a Banking perspective about the reinstatement of the Crown Preference is that HMRC is leapfrogging the floating charge holder on insolvency.

The pain of this manoeuvre will likely be felt more acutely in the Scottish lending market, where, until the Moveable Transactions (Scotland) Bill (discussed here) is enacted, the ability to take fixed security is more restricted than in England.

How are floating charge holders affected?

Before the year is out floating charge holders will have suffered a hat trick of blows in 2020:

First, in April, the prescribed part (a ringfenced sum set aside from net floating charge realisations for the benefit of unsecured creditors), was increased from £600K to £800K, reducing the pool of assets available for distribution to floating charge holders.

Second, in June, the Corporate Insolvency and Governance Act 2020 came into effect. As well as preventing the holder of a floating charge from appointing an administrator or administrative receiver and/or imposing restrictions on the disposal of floating charge assets while the chargor company is in a moratorium, if insolvency proceedings start within 12 weeks of the end of a moratorium, floating charge holders will find monies owed to them postponed to certain debts incurred before and during the moratorium.

Finally, in an insolvency commencing on or after 1 December, the new Crown Preference places HMRC ahead of floating charge holders in the waterfall of distributions to the extent of any VAT, PAYE Income Tax, employee National Insurance contributions and certain other taxes collected by the company on behalf of HMRC. Unlike the prescribed part and its recent increase, the new Crown preference will affect all existing and new floating charges.

What can secured lenders do to protect their position?

For new transactions, lending criteria and security requirements may need to change. Lenders may also consider introducing new information and/or certification requirements and/or restrictive covenants into their documentation with a view to keeping exposure to Crown Preference under review, and to take account of potential reduction to the assets available for distribution to the lender. Any such additional monitoring could impact pricing.

For existing lends, additional and more robust security cover may be required, or, if enforcement action is already being considered, a decision should be taken, and, if appropriate, insolvency proceedings commenced, prior to 1 December.

How can Brodies help?

While recent legal reforms and the new Crown Preference present challenges to holders of Scots law floating charges, we advise on, and assist lenders in, the mitigation of the effects of the changes, and ensure that the secured lenders are in the best position possible in a moratorium and in an insolvency. Please contact Bruce Stephen to discuss how this can best be achieved.


Lindsay Lee

Senior Associate

Louise Laing

Senior Associate