Unsecured creditors should commence Bankruptcy or Winding Up proceedings before 6 April 2020 to avoid possible reduced dividends. Where an Order is made, employees’ will remain as preferential creditors for unpaid wages, holiday pay and pension contributions. HMRC will be secondary preferential creditors for unpaid PAYE, VAT and NIC. Petition costs will remain payable above all claims and other costs.

Where a Bankruptcy Order or Winding Up Order is made, the only preferential creditors at present are employees regarding any claims for unpaid wages, holiday pay and pension contributions. After 6 April 2020 HM Revenue & Customs (HMRC) will regain their status and become secondary preferential creditors. The Enterprise Act 2002 had downgraded HMRC’s status to unsecured creditor.

HMRC are usually the creditor with a significant debt and whilst their preferential  status is for certain unpaid taxes namely, PAYE, VAT and NIC, their status means that the remaining funds to be distributed amongst unsecured creditors are likely to be further reduced. HMRC will remain unsecured creditors in respect of corporation tax and any other taxes owed directly by a company.

The government’s rationale is that it considers HMRC are involuntary creditors when tax is payable under statue, it should not be prejudiced by insolvency and this will increase the Treasury’s revenue to fund public services.

The reduced dividends are likely to have a considerable affect on the remaining unsecured creditors and their creditors and particularly SME’s which may stifle business growth and business collapse. This decline and collapse may also be compounded by lenders with floating charges whose security will be reduced may then reducing granting their loans and also or optionally, increasing their costs of borrowing.

The costs a creditor incurs on a Petition will still remain payable above all claims and other costs.

However one should always consider the advantage and disadvantages of issuing a petition vis a vi the financial status of the debtor which are as follows:

Advantages

  • The threat or commencement of issuing a petition can result in prompt payment.
  • The basic procedure is relatively quick and inexpensive and an Order can me made within about six weeks of presenting a petition. However, a debtor can try and frustrate or delay the insolvency proceedings.
  • If the court grants an Order, the liquidator takes control of all the debtor’s capital and assets. The liquidator has wide-ranging powers to investigate the debtor’s and conduct and can bring legal proceedings to maximise the assets available for distribution amongst creditors.

Disadvantages 

  • This process is not appropriate if the debt is genuinely disputed or if the debtor has a genuine cross-claim or right of set-off. If the court finds this is the case, the petition will be dismissed and the petitioning creditor may be ordered to pay the debtor’s costs. .
  • These proceedings are a class remedy. Once a petition has been issued at court any other creditors can support the petition and seek an Order even if the debtor has paid the original debt.
  • The amount of the dividend payable to unsecured creditors can be a few pence for each pound of debt and may be nothing at all.
  • Where there are assets available for distribution amongst creditors, there can be a considerable delay from the date the Order is made and the payment of a dividend  This delay can be for a period of months or in some cases years.

Therefore a debtor should also consider other methods of enforcement which are appropriate and available to the debtor’s circumstances.

This blog was written by:  Polly Hill

DISCLAIMER: Please note that this post sets out the general position under the general law. It should not be acted upon in any specific circumstances without taking specific legal advice as to those circumstances. Also, it should not be relied upon, acted upon or treated as a substitute for specific advice relevant to particular circumstances. If you do require specific advice please contact us for assistance.

SRA ID Number: 539 811 | Ralli Solicitors LLP is a Limited Liability Partnership registered in England and Wales, company number 0C354973. Ralli Solicitors LLP is authorised and regulated by the Solicitors Regulation Authority.

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