Prescribed part increases to £800,000 from 6 April 2020 – in certain cases

QAD is aware there may be some confusion around changes introduced by The Insolvency Act 1986 (Prescribed Part) (Amendment) Order 2020, which has increased the cap on the prescribed part in insolvency cases from £600,000 to £800,000 in certain circumstances.

What’s not changed?

Any appointments taken up to, and including, on 5 April 2020 won’t be affected.

The prescribed part is still not applicable to floating charges created prior to 15 September 2003.

There isn’t any change to how the prescribed part is calculated. (50% of first £10k of net property and 20% of the rest up to a cap).

What has changed?

The amount of the cap for insolvencies on or after 6 April 2020 will depend on whether there is a ‘relevant floating charge’.

A ‘relevant floating charge’, is a charge:

  • created prior to 6 April 2020; and
  • in respect of which no floating charge over any of the company’s assets created on or after 6 April 2020 ranks equally or in priority.

If the lender has a relevant floating charge, the cap will remain at £600,000 regardless of the date of the insolvency appointment.

So:

  • if the company has no floating charges created on or after 6 April 2020, the new cap will not apply and the prescribed part cap will remain at £600,000; or
  • if the company only has charges created on or after 6 April 2020, the new cap will apply and the prescribed part will increase to £800,000; or
  • where the company has floating charges created both before and after 6 April 2020, the situation is a little more nuanced and will depend on the ranking of the later charge.

A lender whose charge pre-dates 6 April 2020, may still be adversely affected by the increased cap.

Consider the following examples

  1. Bank A lent £20m to a company in 2015 secured by a floating charge. Bank B lent £5m to the same company in May 2020 secured by a second ranking floating charge.                    The company goes into administration and the net property is £7m.                                                                                                                                                                                     In this scenario, Bank A’s floating charge was created prior to 6 April 2020 and Bank B’s charge does not rank equally or in priority.                                                                   Therefore, Bank A holds a ‘relevant floating charge’ and the prescribed part is £600,000.                                                                                                                                               Bank A receives £6.4m under its floating charge (i.e. £7m less £600k) and Bank B does not receive a distribution under its floating charge.                                                                  (In such a scenario, it is likely that Bank B would surrender its security to participate in the prescribed part instead).

      2.   Bank C lent £20m to a company in 2015 secured by a floating charge. Bank D lent £5m to the same company in May 2020 and entered into an agreement with Bank C which meant that Bank D’s charge ranks in priority to Bank C’s, even though it was created later.

The company goes into administration and the net property is £7m.

In this scenario, Bank C’s charge was created prior to 6 April 2020, and Bank D’s charge was created after 6 April 2020 and ranks in priority.

Therefore, neither charge is a relevant floating charge and the prescribed part is £800,000.

Bank D receives £5m. Bank C receives £1.2m. (i.e. £7m less prescribed part of £800k less £5m due to Bank D).

This means that the return to Bank C has been impacted by the increased cap on the prescribed part, even though its charge pre-dated 6 April 2020.

Some tips

When asking solicitors to review the validity of lender security prior to making distributions, IPs may want to ask for confirmation of the required prescribed part cap if there are floating charges created both before and after 6 April 2020.

Where preparing estimated outcome statements as part of an advisory engagement, the statements will need to take these changes into account if there are any floating charges created on or after 6 April 2020. 

Advisors may consider telling lenders with charges pre-dating 6 April 2020 to take care if agreeing to new security which will rank equally or in priority to their existing security, as it could affect the amount received under their charge, even though it may pre-date 6 April 2020.

Anonymous