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1. What are preferential debts?
2. What category of debt is no longer considered preferential?
3. Who will get the money no longer going to the Crown ?
4. How much will the Crown be giving up ?
5. Will existing holders of floating charges be affected?
6. If there is no requirement to set aside the prescribed part because the floating charge was created before 15 September 2003, do all the new rules regarding the application of the prescribed part apply?

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1. What are preferential debts?

The categories of preferential debts are set out in Schedule 6 of the Insolvency Act 1986. When an insolvency office holder comes to make a distribution in an estate, amounts due in respect of preferential debts are paid after amounts secured by a fixed charge, but before all other liabilities.

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2. What category of debt is no longer considered preferential?

Amounts due to the Inland Revenue in respect of income tax and National Insurance contributions in the 12 months prior to the insolvency, and amounts due to HM Customs and Excise including VAT in the 6 months prior to the insolvency. Other categories of preferential debt will remain preferential.

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3. Who will get the money no longer going to the Crown ?

In bankruptcy all amounts no longer categorised as preferential debts will flow to the unsecured creditors.

In corporate insolvencies the next category of creditor to be paid after preferential creditors are holders of floating charges.  Under the provisions of the Enterprise Act, a part of the net property (funds that would otherwise be available to satisfy the claims of the floating charge-holder) will be set aside for the benefit of unsecured creditors – the prescribed part.

The method by which the prescribed part is calculated is set out in the Prescribed Part Order

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4. How much will the Crown be giving up ?

Estimated to be £70 million per year.

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5. Will existing holders of floating charges be affected?

The requirement concerning the prescribed part does not apply against funds available to the holders of floating charges created prior to 15 September 2003. The abolition of the crown’s preferential status does apply in these cases.

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6. If there is no requirement to set aside the prescribed part because the floating charge was created before 15 September 2003, do all the new rules regarding the application of the prescribed part apply?

No – where a floating charge was created prior to 15 September 2003 then there is no statutory requirement to provide the information regarding the prescribed part as per the Insolvency (Amendment) Rules 2003. As an issue of best practice or guidance this information may be provided i.e. to state that the prescribed part does not apply or nil return at the point where it would be provided in cases where section 176A applies.

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