Are we witnessing the demise of floating charges? A lending revolution

Floating charge securities have always been risky for lenders – but nowadays they have gone from a high-risk to a bad bet.

Once lenders could hope to recoup a large proportion of their losses during the insolvency process, these days, most will be nervous about the outcome and with good reason. 

The cause of this shift may surprise you.  It is not the UK’s worsening credit environment, low growth economy, or rising insolvency figures. Though of course these are raising the stakes for lenders across the UK. 

It is the spiralling corporate debt burden at HMRC.

Before the Covid pandemic, UK companies owed HMRC approximately £50bn. A large amount to be sure, but a manageable one. That figure has now reached a staggering £120bn in unpaid taxes.

Here is how it happened. 

The Covid Response

During Covid, the government backed a series of relief measures for UK businesses, such as payment holidays, Time to Pay Schemes, and forbearance.  These allowed businesses to postpone paying their taxes until the national crisis had abated, but they also encouraged a rise in HMRC debt. 

Presumably, the government assumed the economy would bounce-back after Covid, leaving companies able to repay what they owed. Instead, they faced an economic downturn and cost of living crisis which pushed 25,158 companies into insolvency in 2023. 

The Corporate Insolvency and Governance Act

In June 2020, the government restored HMRC to preferential creditor status. This ensured any debts owed to HMRC for taxes held in trust (such as PAYE) took priority over those of other creditors. To make matters worse, no cap was placed on either the age or value of the HMRC debt. 

This spelled potential disaster for security charge holders reliant upon floating charge assets to help cover their position. 

HMRC took eager advantage of its new ranking to recoup its losses, issuing nearly 3,000 winding-up petitions to the High court in 2023 and forcing thousands of companies into involuntary insolvency, largely beyond their reach. 

Unfortunately, many in the industry have yet to notice their changing fortunes.  

There are several new lenders in the UK corporate market who have made loans which are yet to default. When they do, they will discover their debenture securities are potentially effectively worthless. The debts they ‘secure’ largely unrecoverable if sat behind significant HMRC debt.

Most will be left entirely dependent on third party security options such as personal guarantees, to make a recovery in respect of their lending. Others will be forced to accept only those reimbursements available to them through their fixed charge securities, or in the case of asset-based lenders or invoice discounters, through books debts that have been assigned to them under their agreements.

Such cases are already beginning to land on my desk.

Unsophisticated lenders will need to act fast to protect themselves. 

Assessing lending risks on publicly available information alone has become too dangerous. Lenders must dig deeper. Keeping a close eye on their borrowers’ HMRC arrears and requesting Real Time Information reports.

But this is only a temporary fix. 

In the longer term, difficult decisions will need to be made about the role floating charge securities should play in the UK’s credit landscape. 

Indeed, whether they should play any role at all.