UK: The Government Fails To Listen To Lenders As It Presses On With Reforms Which May Stifle UK Enterprise

Last Updated: 24 July 2019
Article by Rachael Markham and John Alderton

We reported last week that the Government intends to proceed with its proposal to reinstate HMRC as a preferential creditor on insolvency, which could spell disaster for UK businesses, lenders and the UK economy.

The Government has failed to listen to lenders and others who responded to the Government's consultation about the impact of its proposed changes to HMRC's status as a creditor in insolvencies.

Squire Patton Boggs hosted a roundtable discussion in May with R3 and representatives from all corners of the lending and restructuring market. The industry as a whole was fiercely opposed to the proposal.

We know that arguments against the proposal, and the concerns and issues of lenders were relayed to HMRC. We also know that respondents to the Government consultation articulated those concerns in their responses, Squire Patton Boggs included.

The message to the government was clear, if HMRC is restored as a preferential creditor this will affect existing lending, this will affect new investment, this will affect business growth and this will affect the UK economy. Have these been messages been taken seriously? It appears not.

Government dismisses lenders' concerns

The Government's response to concerns raised by lenders is dismissive.

Its primary justification for the change is the expected return of £185m from insolvent entities on behalf of the UK tax payer, but the UK tax payer will be impacted in other ways, and significantly so.

If the Government continues to ignore warnings from lenders and the restructuring community about the impact on solvent businesses then the UK economy will almost certainly suffer.

Lenders told the Government that the measure makes it difficult, if not impossible, to make adequate provision when assessing the lending risk, resulting in less funding being available to UK businesses, less funding means less economic growth making the UK a less attractive place for enterprise and foreign investors.

Solvent businesses will be put under financial pressure

As drafted, the proposed legislation provides little comfort to lenders.

Calls from lenders to introduce a cap or time limit on HMRC's preferential claims and a transitional period have been ignored.

This runs the risk of many UK businesses involuntarily breaching the terms of existing facility arrangements post April 2020, creating unnecessary business distress and otherwise avoidable insolvencies.

When responding to concerns raised by lenders about the immediate threat to existing borrowing and potential business failure, the Government said: "that tax payments and liabilities should always be factored into business lending decisions".

Correct, but the Government have frankly ignored the point that existing lending does not have a need to provision for unpaid tax liabilities. Why would lenders haven taken into account a risk which at the time of lending didn't exist?

The government says that it "does not expect this reform to significantly impact access to finance" – lenders believe otherwise – and have told the Government why it will.

So why, when the government says – "The UK's asset-backed finance market totals £4.4bn, while the total SME lending market sits at £58bn. The Government therefore does not expect this change to have a negative overall impact on the economy and has not received any evidence in opposition to this view" – has it not listened to the evidence and views submitted by the lenders?

Yes, "fixed charges over assets will remain above HMRC" but floating charges which will rank behind HMRC are integral to supporting the growth of UK business.

Proposals to relieve the pressure ignored

Whilst opposed to the measure, lenders suggested that HMRC's preferential claims at the very least, be restricted in time and/or amount and that there be transitional arrangements.

The Government's reasoning for not including a time limit on claims: "It is not fair to those individual tax payers, or to the taxpaying public, if those amounts are lost in liquidation".

But what about the losses if more businesses fail, if tax payers are made redundant, if there is less growth and investment in the UK? Even without an economic analysis of the figures, the tax payer suffers the most.

The Government's response to suggestions that the measure should only apply to floating charges created after 2020 was:

"if the measure does not apply to pre-existing floating charges, such an approach could skew behaviour by providing an impetus to retain pre-2020 floating charges unnecessarily, as they would be deemed more valuable than post 2020 floating charges. This could also distort the asset based lending market."

To the contrary, this could also see more companies forced into an insolvency process before April 2020 to maximise recoveries before preferential status is restored- the worst of all worlds!

We are not aware that changes brought in by the Enterprise Act in 2003, which introduced the prescribed part skewed lenders behaviour. In fact, transitional arrangements in 2003 gave lenders time to plan and adapt to the change – why should transitional arrangements distort the asset based lending market this time around?

Final thoughts

Whilst along with the vast majority of lenders and the restructuring community we do not support the proposal at all, a time limit and/or cap on HMRC's claims and transitional provisions strike a much fairer balance between the existing interests of creditors, the Exchequer and lenders than currently proposed.

This would enable lenders to make a proper assessment of the lending risk and allow lenders time to plan and make suitable changes to lending practice to reflect the change post April 2020.

Next steps

Further comments can be made on the legislation until 5 September 2019 and details of how to respond can be found here.

We understand that R3 will continue to lobby the Government about this proposal and would encourage lenders' representative bodies and the wider lending and restructuring community to do the same.

Hopefully, the Government will listen, otherwise this measure may impact the UK economy just as much as any potential fall out from Brexit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions