Changes to the Insolvency Rules 2020 that you Need to Know

There have been a few changes over the last year which need to be highlighted, we’ve gone through them below:

Joint liability notices

Directors will be held personally liable for repeated company insolvency and inability to pay tax in 5 years, effective from 22/07/2020. They will be held responsible if they had:

• At least two old companies similar to their current company that became insolvent.
• Previous companies were guilty of non-payment of tax, and at least one owed HMRC above £10,000 and represents more than 50% of the firm’s liabilities to unsecured creditors.
• A new company performing the same or similar trade.

A Joint Liability Notice (JLN) can be issued by HMRC, making the company director jointly liable with past companies for tax charges at the date of the Joint Liability Notice and jointly liable with the new business for any failure to pay tax at the date of the JLN, and any tax liability that will arise in the next five years.

This is another rule that will significantly increase the personal risk to company directors from different company insolvencies. We do not know how often this power will be used by HMRC, given that we are familiar with similar powers they barely use.

Pre-packs

A compulsory scrutiny of pre-packs is another thing that will be passed into law before June 2021, which in the eyes of the government has been a rebel for insolvency ever since it was introduced in the early 2000s as a common process in insolvency.

In 2015, pre-packs got tightened by some professional regulations, but this time around, the government took another step further. When this happens, any business pre-pack sale and assets in administration requires either approval from creditors (which will likely not happen since pre-packs don’t offer themselves to consulting with creditors in advance, and it would create a lot of uncertainty to rely on the consent of retrospective creditors or opinions from an independent evaluator.

This will likely be the breaking point for SMEs; thus, the process of administration will be too cumbersome and expensive leaving liquidation, which also shuns a better alternative – TUPE.

Preferential creditor status

After a break that lasted 17 years, the HMRC’s preferential creditor status is back. Thus, any insolvency appointment after the 1/12/2020, business taxes which has been remitted by employees (PAYE/employees NIC/CIS/student loan repayments), and customers (VAT) will now be referred to as a secondary preferential creditor paid after current preferential arrears of wages and holiday pay preferential creditors.

This will change everything. The most significant creditor in SME insolvencies is usually HMRC for PAYE/NIC/VAT, so paying dividends to ordinary creditors during insolvencies will become history. Additionally, recovery by banks under their floating charges will be less, and we are expecting to receive more calls under personal guarantees.