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Peer2Peer Finance News | November 14, 2018

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Insolvency reforms may hinder P2P loan recoveries

Insolvency reforms may hinder P2P loan recoveries
Marc Shoffman

REFORMS to the way HMRC is treated as a creditor will make it harder for some peer-to-peer lending platforms to recover bad debts, an insolvency practitioner has warned.

Chancellor Philip Hammond announced in his 2018 Budget last week that HMRC would be given preferred creditor status in business insolvencies to ensure tax is collected.

Simon Bonney, a partner at Quantuma, told Peer2Peer Finance News this would impact any P2P platforms accepting floating charges, such as stock, receivables or cash at the bank, as security on loans.

Due to the regulatory shake-up, floating charges will be further down the pecking order when creditors are paid following an insolvency.

Currently, when a business goes into administration, the first funds go to paying the administrator, followed by any fixed charge such as on a property.

The next preferential creditors are employees, who will get their wages paid from any funds left, followed by those with a floating charge.

HMRC is currently an unsecured creditor and gets paid last, but this will change from April 2020 and it will rank just after employees as preferential creditor and ahead of those with a floating charge.

Bonney said P2P lenders who use floating charges will need to consider any HMRC arrears when conducting their due diligence on borrowers.

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“Since 2003, when HMRC’s preferential status was removed, HMRC arrears were an indicator of cash flow challenges in a business which served as a warning to potential risk of failure,” Bonney said.

“However, it did not affect the position of a secured lender. These new measures will fundamentally change a lender’s potential recovery from an insolvency process.

“For unsecured lenders, HMRC’s priority is likely to extinguish any return to unsecured creditors in small- and medium-sized enterprise (SME) insolvencies.

“For secured lenders, realisations from floating charge assets, which make up the majority of most balance sheets, will now first go to reduce employee claims and HMRC arrears before funds are available to the secured creditor under their floating charge.

“P2P lenders [using floating charges] should be demanding better and more regular basic management information on their customers to understand where HMRC debt may be increasing and then taking advice to understand the potential consequences and manage risk.

“We are already advising P2P lenders on ways in which to improve their risk monitoring and management procedures and these changes place further emphasis on getting those procedures right.”

Read more: Everything you always wanted to know about P2P tax