31/10/2019 - News

Borrowers of asset-based lending (ABL) stock facilities should consider upcoming changes in Crown Preferences

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Clearwater International’s UK Debt Advisory team is working with ABL borrowers 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. This could have a material impact on the ABL borrowing capacity of stock facilities.

In the October 2018 budget, it was announced that HMRC is to become a preferential creditor in corporate insolvencies. As a result, it’s expected from 6th April 2020 that certain debts owed by an insolvent company, including VAT, will be repaid to HMRC in priority to debts owed to floating charge holders. This is therefore likely to have an impact on stock ABL facilities, as lenders of these facilities typically hold a floating charge over the assets, rather than a fixed charge.

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 (i.e. a debtor facility)

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, but not specific items of stock). ABL is a common type of floating charge lending.

5. Unsecured creditors – Almost all other creditors. HMRC is currently an unsecured creditor.

6. Shareholders

Lenders may therefore create an additional ‘reserve’ to take account of the change in priority of HMRC, which will impact the headroom / borrowing availability in the facility

Early engagement on the change may help form discussions with lenders to agree an outcome that is satisfactory to both borrower and lender.

To discuss any areas of your existing ABL facility, or how we can assist your business with Crown Preference reserves, please contact:

Mark Taylor
David Grassby

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