Back in August 2018, in its paper entitled “Government Response: Insolvency and Corporate Governance” (the 2018 Paper) the Government responded to its consultation on ‘Insolvency and Corporate Governance' with the announcement of several reforms and proposed next steps.
The original consultation threw out the question as to whether the £600,000 cap on the prescribed part should be retained, increased or removed completely. The prescribed part is the part of the property of a company that a liquidator, administrator or receiver must reserve for unsecured creditors, under section 176A of the Insolvency Act 1986, and which would otherwise be available to satisfy claims secured by a floating charge.
Responses were mixed, with support for each alternative. In its 2018 Paper, the Government expressed support for an increase to the cap from £600,000 to £800,000, linked to the impact of inflation on the current cap since it first came into effect in 2003.
To legislate for the increase, The Insolvency Act 1986 (Prescribed Part) (Amendment) Order 2020 was made on 3 March 2020 and laid before Parliament on 5 March 2020. The Order amends The Insolvency Act 1986 (Prescribed Part) Order 2003 to increase the prescribed part cap from £600,000 to £800,000 and comes into force on 6 April 2020.
Lenders with floating charges should note that the Order will not apply to floating charges created before 6 April 2020 (a “grandfathered floating charge“) provided no floating charge is created after 6 April 2020 which ranks equally with or in priority to the grandfathered floating charge.
The Government noted in its 2018 paper that “while prescribed part payments very rarely reach the current cap, in the small number of cases that do, it will mean that unsecured creditors will benefit from increased payments“. Whether this means that lenders to small businesses, who will accordingly suffer a corresponding drop in their recoveries, will be less willing to lend on the basis of floating charge security only remains to be seen.
Authored by Jayne Sheffield