A new insolvency law, set to come into force next month, poses a significant threat to the survival of businesses already struggling with an additional lockdown and the possibility of a no-deal Brexit, according to the Midlands branch of insolvency and restructuring trade body R3.
From 1st December, preferential status in insolvencies will be granted to HMRC, which means that repayments to creditors by insolvent companies will be made to the Treasury, ahead of other creditors like suppliers, lenders and pension schemes. These creditors will only be paid once HMRC has been paid in full.
R3 Midlands believes that the introduction of the new law is badly timed and will damage business finance and business rescue, with unnecessarily negative consequences for jobs, livelihoods and the economy.
R3 Midlands Chair Eddie Williams, a partner at Grant Thornton in the East Midlands, said: “R3 has warned the Government on several occasions that the change in HMRC’s creditor status should be reviewed, or that steps should be taken to mitigate its impact.
“Now is not the time to increase the financial pressure on trade creditors, many of which may already be struggling due to a customer or supplier insolvency. It is also not the time to introduce a law which may affect business lending.
“Floating charge lenders – an essential source of finance for retailers and SMEs – have already warned that granting HMRC preferential status will limit the availability of this type of finance, which will have serious consequences for businesses who use it for business rescue or growth.”
R3 Midlands is particularly frustrated that there has been no Government consultation regarding the new law since its proposal in 2018, and that the Government has failed to listen to the near unanimous opposition to the policy from leading business groups and lenders.
Eddie Williams continued: “What we are seeing here is a short-term gain for HMRC at the expense of a long-term cost for businesses and the economy. Rather than trying to skip the repayment queue, the Government would reap greater benefits if HMRC were to engage proactively and commercially as a key creditor in corporate insolvencies.”