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Lenders beware: Return of the Crown!


With UK Finance reporting that invoice finance and asset-based lending has grown this year to £22.7 billion from £17.8 billion in 2015, it is clear that this is a key source of business funding, particularly to the Small / Medium Enterprise (SME) marketplace.

Reintroduction of preferential status for crown

Despite these lenders being of fundamental support to the growth of businesses across the UK, it is perhaps surprising that, after a 16-year absence, the Government, in its recent spending review, has confirmed that it proposes to re-introduce crown preferential status for certain HMRC claims in the context of a business insolvency.

Most lenders will take a fixed and floating charge, better known as a debenture, as security for their facility. The return of crown preferential status for HMRC will mean that HMRC will, for certain heads of claim, leap frog secured creditors and be able to claim a dividend out of floating charge assets, ahead of the secured creditors. The net effect in many cases is that this will result in the value of a secured creditor’s security being diminished, particularly if there are insufficient assets to pay off both HMRC and the secured creditor in full.

Less appetite for lending

It is likely that lenders, and those who largely rely on floating charge assets as security, or operate in the more distressed end of the SME marketplace, may have less appetite to lend. To the extent that they do, they will look to tighten their lending criteria by increasing interest rates, taking additional security from directors and taking specific charges on what would otherwise be floating charge assets.

It is also likely that when insolvency practitioners sell businesses out of liquidation or administration that lenders will again take a keener interest in how realisations are being applied between fixed and floating charge assets. Currently, the change will only relate to insolvency proceedings begun after 6 April 2020, which could see some timing insolvencies take place prior to that date.

If funders do, in time, change their lending profile and have less appetite to take on certain businesses, then it could see this key support line for SMEs coming under pressure.

If you have any questions about the issues raised in this blog, please contact a member of our Business Restructuring and Insolvency Team.

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.