31/10/2019 - News

Could upcoming changes in Crown Preference impact the availability of asset based lending (ABL) stock facilities?

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Clearwater International’s UK Debt Advisory team is working with a range of companies using ABL facilities to determine the impact of changes in Crown Preference. Crown Preference, which would move some of HMRC’s debt up the hierarchy from unsecured to preferential creditor, is expected to return from April 2020. Analysis that ABL lenders have performed may need to be revisited, which could have a material impact on the ABL borrowing capacity of inventory & stock facilities.

In the October 2018 budget, it was announced that HMRC is to become a preferential creditor in corporate insolvencies. The purpose of the change is to increase returns to HMRC in the event of a company liquidation. As a result, it is expected from 6th April 2020 that certain debts owed by an insolvent company, including PAYE, employees NIC and VAT, will be repaid to HMRC in priority to debts owed to floating charge holders. This could therefore have an impact on stock ABL facilities, where lenders typically take a floating charge, as a Pound for Pound reduction in the company’s liquidity position could be applied by the lender.

The order of priority for repayment in corporate insolvencies is:

  1. ‘Fixed charge’ creditors – Creditors whose lending to a company is secured against a definable object (e.g. a mortgage over land);
  2. Insolvency process costs;
  3. Preferential creditors – If the above change is implemented, from 6 April 2020, some HMRC debts will be ‘preferential’;
  4. ‘Floating charge’ creditors – Lending secured against a class of asset (e.g. ‘stock’ in a warehouse, or other assets that fluctuate in the ordinary course of business without control by the lender);
  5. Unsecured creditors – Almost all other creditors. HMRC is currently an unsecured creditor; and
  6. Shareholders.

In a scenario where a lender creates an additional reserve, facility headroom and borrowing availability may be impacted.

Whilst the landscape and lender interpretations of the rules are undetermined, early engagement on the change may help form discussions to agree an outcome that is satisfactory to both borrower and lender.

Our advice to ABL borrowers is:

  1. Assess headroom in existing facilities;
  2. Determine how reliant the business is on its stock facility;
  3. Talk to your lender to understand their approach; and
  4. Engage early with professional advisers.
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