If a company enters into any form of insolvency, whether it’s a company voluntary arrangement, a pre-pack administration or a restructuring plan, it’s likely that one of the major creditors will be HMRC. It’s often believed that any taxes owed have to be paid first, before any other debts have to be considered.
However, the situation is far from simple. Some recent cases have supported HMRC’s claims, while others have backed other creditors’ rights to be considered equally. So, what is the position?
Section 176A of the Insolvency Act 1986 introduced the concept of the “prescribed part”, intended to mitigate HMRC’s special status among creditors of an insolvent company. This effectively reduced them to the status of an unsecured creditor where distribution of funds in an insolvency was concerned.
This situation seemed to have been revered in 2020, with the Finance Act 2020 giving some taxes preference over most other creditors. However, the same year saw the introduction of restructuring plans, which provided for dissenting classes of creditors to be “crammed down” by other classes.
This was taken to mean that, under a restructuring plan, the other creditors could combine to override HMRC’s preferential status. However, the confusion this raised concerning conflicting rights meant that the position would need to be determined in court.
The Court Cases
In the first legal challenge to the “cram down” right in 2022, concerning the insolvency of Houst Ltd, HMRC failed to overturn the altered priority that effectively cancelled their preferential position. This was partly, however, because HMRC failed to make much effort to defend its position in court.
In the three cases brought since, two have found for HMRC and one against. These decisions have been less about the basic legal principle, however, and more about the specific circumstances. In the two cases HMRC won, the companies had had past issues in payment of taxes, and also the shareholders offered no proposal to inject more funds into the companies.
In general, the courts have seemed to agree with the “cram down” rights, provided there’s not too much prejudice against HMRC. As one judge put it, the restructuring plan shouldn’t be “an instrument of abuse” for unpaid tax bills.
Where Does This Leave You?
If you’re involved in an insolvency case, either as creditor or the insolvent company, the best approach is to find a solution that is of most benefit to you. At present, it will be difficult to tell whether any “cramming down” on HMRC will be successful.
Even better, of course, is to avoid insolvency, whether for yourself or for one of your customers. If you can work with a debtor to enable them to pay what they owe, you’ll be likely to end up with more than you’d get through insolvency. Give me a call to see how I can help with that.