Finance Act 2020

By Brabners LLP

04 Dec 2020

pexels-karolina-grabowska-4491441.jpg

On 22 July 2020 the Finance Bill gained royal assent giving rise to the Finance Act 2020. Below, you will be taken through an overview of how creditors are paid in an insolvency process as well as how two of the key changes could affect your business going forward.

How Are Monies Distributed to Creditors in an Insolvent Company?

The insolvency regime sets out a strict order of preference, a statutory waterfall that ranks creditors based on the strength of their claim. The order of preference exists to divide the residue of an insolvent estate between creditors on a pari passu (on equal footing) basis.

Those with valid fixed charge security or proprietary right to assets held by the company such as a Quistclose trust or an express trust have first ranking claims. This ensures that a lender such as a bank with a registered mortgage or fixed charge is paid from money generated from the sale of the secured asset less the fees and administrative expenses connected with the realisation of that asset of the appointed insolvency practitioner. This payment is limited to the proceeds of the relevant asset and does not include any realisations made from unsecured assets, which are available to creditors of the company as a whole.

Second ranking payments are the expenses of the insolvent estate. These include expenses incurred when trading an insolvent company and those from the preservation of assets, which rank in priority to the second ranking expense of the insolvency practitioners fees and disbursements.

The third ranking payments are those of preferential creditors, such as employees with outstanding wages up to £800, holiday pay and some pension scheme contribution liabilities.

Fourth ranking payments begin with the Prescribed Part, for which the following statutory calculation exists:

3.(1) The Prescribed Part of the company’s net property to be made available for the satisfaction of unsecured debts of the company pursuant to section 176A of Insolvency Act 1986 shall be calculated as follows—

where the company’s net property does not exceed £10,000 in value, 50% of that property;

subject to paragraph (2), where the company’s net property exceeds £10,000 in value the sum of—

50% of the first £10,000 in value; and

20% of that part of the company’s net property which exceeds £10,000 in value.

(2) The value of the prescribed part of the company’s net property to be made available for the satisfaction of unsecured debts of the company pursuant to section 176A shall not exceed £600,000.

After the net property subject to a floating charge has had the prescribed part removed, the remainder is available for distribution to floating charge holders. A floating charge can be held over any company asset, such as work in progress, stock, plant and machinery and any asset not subject to a fixed charge.

The remainder of unsecured assets and the prescribed part form the pool from which unsecured creditors are paid as a fifth ranking claim on a pari passu basis, which means they receive a fixed repayment of X pence in the pound in proportion to the size of their claim. A secured creditor who was not repaid in full from the sale of the secured asset can claim for the shortfall in the insolvent estate as an unsecured claim. The prescribed part, however, cannot be used to repay a shortfall, its repayment must come solely from the realisation of unsecured assets. The Crown currently ranks as an unsecured creditor for claims for unpaid taxes.

In the unlikely event that after the payment of all creditors a surplus of funds exists, the surplus is distributed to the company shareholders. This is a sixth ranking claim.

What happened to Crown Preference?

In s 252 Enterprise Act 2002, the preferential status of crown debts for unpaid taxes was abolished. Prior to this HMRC debts in the 12 months for Pay-as-you-earn tax (PAYE) and National Insurance Contributions (NICs) and 6 months for Value Added Tax (VAT) leading up to insolvency were preferential and were a third ranking payment. The government wished to encourage a more positive shift in perspective from the doom and gloom of insolvency being synonymous with company death to the idea of restructuring, rescue and recovery and to instil a survival culture amongst struggling UK businesses. By lessening the burden of tax debts, more of the money generated realising assets were available to floating charge holders and unsecured creditors. This was intended to encourage enterprise and allow asset-based lenders to have more confidence in the security of a floating charge and thus lend more readily.

In my next blog I will be discussing the return of Crown preferential status alongside other key changes. If you would like to discuss this further or need advice please do not hesitate to get in touch with a member of our Insolvency Team.

Latest news

1

Post Office future secured as council explores new options Abington Street Post Office

Post Office future secured as council explores new options

17 Sep 2025

2

Airframe Designs supports new defence strategy with pledge to nurture talent Jerrod Hartley

Airframe Designs supports new defence strategy with pledge to nurture talent

17 Sep 2025

3

Fox Group makes second acquisition since Stellex Capital backing Roger Thistlethwaite, managing director NMS Civil Engineering Limited. Paul Fox, CEO Fox Group. John Flood, Executive Director Fox Group

Fox Group makes second acquisition since Stellex Capital backing

17 Sep 2025

4

Villa at Wrea Green bought for £3.6m by Haythornthwaite family The Villa Wrea Green courtesy of The Villa Wrea Green

Villa at Wrea Green bought for £3.6m by Haythornthwaite family

16 Sep 2025

5

Fourth Lancashire Bodycare store to shut Nick Holloway of administrators Interpath

Fourth Lancashire Bodycare store to shut

16 Sep 2025

Background image for hub sign up block

LBV Hub

Leverage Lancashire Business View platforms

Post your news
Post your events
Post your offers
Build your network
Improve your SEO
Gain coverage in the magazine
Sign-up
Events
LBV124 September/October Launch Event
MBP Arc Cinema Preston Opening 205
Networking
18 Sep 2025

LBV124 September/October Launch Event

The Arc Cinema, Preston, PR1 2BL

08:30 - 10:30

CMI Level 5 Management and Leadership Course
UCLanAerialCampus.jpg.jpg
LBV Hub Seminars
21 Feb 2025 - 21 Feb 2026

CMI Level 5 Management and Leadership Course

Preston Campus, Preston , PR1 2HE

09:00 - 17:00

CMI Level 5 Project Management Course
UCLanAerialCampus.jpg.jpg
LBV Hub Seminars
21 Feb 2025 - 21 Feb 2026

CMI Level 5 Project Management Course

Preston Campus, Preston, PR1 2HE

08:00 - 17:00

Ladies Lunch
Lancs-cham-logo.jpg.jpg
LBV Hub Networking
18 Sep 2025 - 18 Sep 2025

Ladies Lunch

Lancaster Golf Club, Lancaster, LA2 0AJ

12:00 - 16:00

Cumbria Business Expo 2025
https---cdn.evbuc.com-images-880461633-4862066883-1-original.20241022-110415.jpeg.jpg
LBV Hub Exhibitions
19 Sep 2025 - 19 Sep 2025

Cumbria Business Expo 2025

Carlisle Racecourse, Carlisle, CA2 4TS

09:00 - 15:00

Preston Freelancer Meet-Up: September
Sept Freelancer (1).png.png
LBV Hub Networking
23 Sep 2025 - 23 Sep 2025

Preston Freelancer Meet-Up: September

Society1, Coworking Space, Preston, PR1 3LT

10:00 - 11:30

Your Business, Your Region: Making sense of devolution and Local Government Reorganisation
Chorley Council breakfast event new
LBV Hub Networking
23 Sep 2025 - 23 Sep 2025

Your Business, Your Region: Making sense of devolution and Local Government Reorganisation

Worden Hall, Leyland, PR25 3DH

08:00 - 11:00

Speed Networking with BNI
2.png.png
LBV Hub Networking
24 Sep 2025 - 24 Sep 2025

Speed Networking with BNI

Chorley Football Club, Chorley, PR7 3DU

16:00 - 19:00

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) drop-in day
MTD drop in session.jpg.jpg
LBV Hub Seminars
25 Sep 2025 - 25 Sep 2025

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) drop-in day

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) drop-in day, Blackburn, BB1 5QB

10:00 - 16:00

The Marketing Metrics That Matter – Sept 25
Metris 25.09.png.png
LBV Hub Seminars
25 Sep 2025 - 25 Sep 2025

The Marketing Metrics That Matter – Sept 25

Door4 Office, Burnley Wharf, Burnley, BB11 1JG

09:00 - 11:00

The Marketing Meetup IRL: Lancashire - September
TMM Lancashire
LBV Hub Networking
25 Sep 2025 - 25 Sep 2025

The Marketing Meetup IRL: Lancashire - September

Chorley, PR7 2SL

18:00 - 20:00

Help to grow management course
Help to grow - barriers to growth.png.png
LBV Hub Seminars
26 Sep 2025 - 16 Dec 2025

Help to grow management course

Preston Campus , Preston , PR1 2HE

09:00 - 15:00

Advertise with us

Reaching 50,000 members, our print, digital and event platforms offer a fantastic way to raise your business profile and help you grow.

Find out more LBV124 Online Graphic
Subscribe now

Weekly news bulletin