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Enterprise Act 2002

Sections 251 and 252: Abolition of Crown Preference & Unsecured creditors

721.The White Paper ‘Productivity and Enterprise: Insolvency – A Second Chance’ made a commitment to abolish the Crown’s preferential status in insolvency, and to ensure that the benefit went to unsecured creditors for companies that have given floating-charges after the provision has come into force.

722.As a preferential creditor, the Crown can currently claim its debts from an insolvent company or bankrupt estate ahead of secured creditors, who hold a floating charge, and unsecured creditors. The Crown’s preferential debts are described in sections 386 and 387 of, and Schedule 6 to, the Insolvency Act 1986, and include arrears of PAYE, NIC, and VAT for the following periods:

  • debts due to the Inland Revenue for 12 months prior to the relevant date (category 1 of Schedule 6);

  • debts due to Customs and Excise for the 6 to 12 months prior to the relevant date (category 2 of Schedule 6);

  • social security contributions for the 12 months prior to the relevant date (category 3 of Schedule 6)..

723.The Act will abolish the Crown’s preferential status.

724.The relevant date is defined by section 387 Insolvency Act 1986.

725.Preferential status will remain for:

  • contributions to occupational pension schemes (category 4);

  • remuneration of employees for the relevant period (category 5); and

  • levies on coal and steel production under the European Coal and Steel Community (ECSC) Treaty.

726.In addition, Schedule 17 removes section 189(4) of the Employment Rights Act 1996. As a result, the Secretary of State will no longer be paid in priority to any remaining preferential claims lodged in the insolvency proceedings by former employees. The Secretary of State will remain a preferential creditor where he has “stepped into an employee’s shoes” and made payments from the National Insurance Fund to cover all or part of any employee’s preferential claims.

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