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Insolvency Law – more bank bashing?

09 January, 2019Keith Pond

Houdini Banking?Houdini

In a previous blog, Floating or sinking?, I reflected that the Insolvency Act 1986 and the Enterprise Act 2002 had a combined influence on the deterioration of the mighty “floating charge”.  The introduction of the role of an Administrator and the ring-fencing of the “Prescribed Part” of floating charge realisations have limited the value that a bank might place on this type of security.

Just like Harry Houdini, however, as the legislators add further chains and manacles to the bank’s position, the banks engineer ways to avoid them, escape from them and, in so doing, undermine efforts to constrain them.

One common feature amongst commercial banks is the rise in Invoice Discounting. No longer do banks need to navigate the legal minefield of Brumark (Zea, 2003) where maintaining a fixed charge over book debts was made almost impossible for banks. Trade debtor financing through asset-based financing avoids this mess and even gives regulatory capital advantages to banks.

Preferential treatment?

In the 2018 budget, however, (HM Treasury, 2018) banks are given another blow. The HMRC status as an unsecured creditor in insolvency since the Enterprise Act 2002 changes took place, is to be changed back to being Preferential.

Currently, Preferential status in insolvency (paid after fixed charges and IP fees but before floating charges) is reserved for unpaid wages and holiday pay. This protects employees of failed businesses, to a certain extent, but is limited to £800 per employee or 16 weeks wages, whichever is the lower, a level that has barely changed since the 1970’s.

According to the Insolvency Service Technical Manual (2014), however, creditors that have paid “preferential” wages, for example by drawing on an overdraft, are able to claim a right of subrogation – in effect becoming “preferential” themselves.

Wages accounts and dear old Mr Clayton

So, should banks fight back and use a 19th Century legal remedy (Clayton’s case) and establish “Wages” accounts for failing corporates? Separate wages accounts are necessary as Clayton’s case (Overy, 2018) establishes that new credits to an account extinguish the oldest debits. This means that wages advances, unless frozen in a separate account, could be repaid as normal trading receipts are credited to a company bank account.

If the changes to HMRC status are agreed by parliament we could see banks thinking like Houdini, once again, to promote themselves in an insolvency and escape the constraints that beset them.


References

HM Treasury, 2018, Budget 2018: Protecting your taxes in Insolvency, read now.

Insolvency Service, 2014, Subrogation of claims to third party, Technical manual, read now.
Overy E, 2018, Clayton’s Case: the 21st century impact of a 19th century bank failure, Journal of International Banking and Financial Law, Butterworths, Issue 3, March, read now.
Pond K, 2018, Floating or Sinking: LIBF Insolvency blog, March, read now.
Zea A, 2003, Row denies creditors £200m pot, Accountancy Age, read now.

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