First Among Equals: The Revenue Commissioners as Preferential Creditors in Corporate Insolvency
| Date | 01 January 2021 |
| Author |
1
First Among Equals: e Revenue Commissioners
as Preferential Creditors in Corporate Insolvency
JOSHUA KIERAN GLENNON*
‘We will make HMRC a preferred creditor in business insolvencies, to
ensure that tax that has been collected on behalf of HMRC is actually
paid to HMRC’1
is sentence, buried deep within Chancellor of the Exchequer Philip Hammond’s
2019 Budget Speech, went all but unacknowledged in debates on the passage of the
UK Finance Act 2019.2 However, it represents a signicant reform in the manner
in which corporate insolvencies have been administered in the UK for the past 18
years.3 e Enterprise Act 2002, in abolishing the preferential status of debts owed
to Her Majesty’s Revenue and Customs (‘HMRC’),4 brought an end to a Royal
Prerogative that can be traced back to the Magna Carta.5 Not only a feature of
UK insolvency law, the so-called ‘Crown Preference’6 was part of the common law
legacy bequeathed to the British colonies, and remained part of their jurisprudence
for generations.7
e recent re-introduction of Crown Preference in the UK (initially scheduled
for 6 April 2020,8 but delayed until 1 December 2020)9 represents an opportune
moment to consider the development of the corresponding position in Ireland.
* B.C.L (UCD). e author is currently an LL.M. Candidate at Harvard Law School, supported by
a Fulbright Student Award. Sincere thanks to Dr Noel McGrath for his support throughout the
writing of this paper, and to Dr Emer Hunt, Mr Brian Hutchinson and Dr Cliona Kelly for their
comments on an earlier dra. Any views or opinions expressed in this article are the personal views
and opinions of the author.
1 House of Commons Deb 29 October 2018, vol 648, col 662.
2 With two exceptions, both in support of the policy: House of Commons Deb 20 November
2018, vol 649, col 798; House of Commons Deb 20 November 2018, vol 649, col 818; with its
reintroduction delayed to Dec 2020, more time was made available for contributions in opposition,
from both Government and Opposition Members in both Houses: e.g. House of Commons Deb
11 March 2020, vol 673, col 312 per Sir Peter Bottomley (Con); House of Lords Deb 17 Jul 2020,
vol 804, col 1908 per Baroness Kramer (Lib Dem).
3 Louise Gullifer, ‘e Reforms of the Enterprise Act 2002 and the Floating Charge as a Security
Device’ (2008) 46 Can Bus LJ 399.
4 Enterprise Act 2002 (UK), s 251.
5 Barbara Day, ‘Should the Sovereign be Paid First? A Comparative International Analysis of the
Priority for Tax Claims in Bankruptcy’ (2000) 74 Am Bankr LJ 461, 463.
6 Morris Shanker, ‘e Worthier Creditors (and a Cheer for the King)’ (1976) 1 Can Bus LJ 340.
7 Day (n 5).
8 HM Treasury, Protecting Your Taxes in Insolvency (2018) 8.
9 Finance Act 2020 (UK), s 98(7).
2
Despite emanating from the same sources, the preference in Ireland has diverged
signicantly from its UK equivalent.10 Rather than being restricted, as was (until
recently) the trend in the UK, Ireland has seen the priority aorded to the Revenue
Commissioners (‘Revenue Preference’) consistently rearmed and expanded.
While the recovery of unpaid tax debts may on the surface appear to be a relatively
uncontroversial proposition, it has the potential to have signicant impacts for
other creditors in insolvency.11 It has been termed ‘a direct contradiction of the
pari passu principle’,12 and, as was noted in the UK, the equitable distribution of
the assets of the insolvent among the unsecured creditors is, ‘in the overwhelming
majority of cases … substantially frustrated by the existence of preferential debts’.13
e preferential payments regime currently prevailing in Ireland can be summarised
as follows. On a winding up, once the holders of xed charges have been paid out
of the charged assets,14 and the costs and expenses of the liquidation15 and certain
social welfare payments16 have been settled, the liquidator must pay those debts
owed to the preferential creditors specied in section 621 of the Companies Act
2014. ese creditors include the Revenue Commissioners in respect of all unpaid
taxes assessable on the company, and unpaid PAYE, VAT, and local property
tax;17 employees in respect of unpaid wages, all accrued holiday pay arising on
termination, claims for damages arising from workplace accidents and unpaid
sick-leave payments; unpaid employee social welfare contributions; and unpaid
employee pension contributions. Priority over tax claims is limited to those arising
in the 12 months prior to the winding up, with the exception of local property tax
10 omas Courtney, Bloomsbury Professional’s Guide to the Companies Act 2014 (Bloomsbury
Professional 2014) para 7.076.
11 Laurence Gower, Principles of Modern Company Law (5th edn, Sweet & Maxwell 1992) 421; for
a recent analysis of Irish preferential debts, looking both at the currently existing class of preferred
creditors, and discussing the potential for adding to the list, see Jonathan McCarthy, ‘Preferential
Creditor Status in Irish Corporate Insolvency Law: A Need for More Priorities?’ (2020) 4(1) Irish
Judicial Studies Journal 62.
12 Irene Lynch-Fannon and Gerard N Murphy, Corporate Insolvency and Rescue (2nd edn, Bloomsbury
Professional 2012) para 8.81.
13 Review Committee for Insolvency Law and Practice, Report of the Review Committee (Cmnd 8558,
1982) (Cork Committee) para 1396; cf the response from the British Government of the day:
Department of Trade and Industry, A Revised Framework for Insolvency Law (Cmnd 9175, 1984).
14 Assets subject to a xed charge remain outside the winding-up process, and the holder of such
a charge is entitled to rely on his own specic security to recover his debt (omas Courtney,
e Law of Companies (4th edn, Bloomsbury Professional 2016) 26.163; Companies Act 2014, s
619(1)(a): ‘In the winding up of an insolvent company, the same rules shall prevail and be observed
relating to – (a) the respective rights of secured and unsecured creditors … as are in force for the
time being under the law of bankruptcy relating to the estates of persons adjudicated bankrupt’;
Bankruptcy Act 1988, s 136(2): ‘is section shall not aect the power of a secured creditor to
realise or otherwise deal with his security in the same manner as he would have been entitled to
realise or deal with it if this section had not been enacted’.
15 Companies Act 2014, s 621(8).
16 E .g. Social Welfare (Consolidation) Act 2005, s 19(2).
17 Companies Act 2014, s 621(2)(a); local rates owed by the company are included in this category
also.
e Revenue Commissioners as Preferential Creditors in Corporate Insolvency 3
levied directly on the company, in which respect the priority has no time limit.18
Employees priority wage claims are capped at four months, with a limit of €10,000
per claimant.19 e Revenue Commissioners can also obtain a form of super-
priority over certain taxes in cases where a tax debtor has borrowed under a xed
charge on the book debts of the company.20 While these are the main classes of
preferential payments, certain other enactments do provide priority in specic
cases.21 Priority debts rank equally among themselves, and must be paid in full
before the holders of xed charges, unsecured creditors, and the shareholders as
the ultimate residual claimants can be paid in full.22 In practice, this is likely to be
the case, with McCarthy noting that the preferential creditors are oen not paid in
full, and that any recovery for unsecured creditors in a liquidation are rare.23
roughout the development of this legislative scheme, various arguments have
been raised both in support of, and in opposition to a priority for taxing authorities.
Despite this issue having arisen in many jurisdictions over the past century, the
arguments display a remarkable consistency, and can be summarised thusly. In
support of Revenue Preference, it is argued that the State is an involuntary creditor
in bankruptcy, and therefore should not be subordinated to the debts of those who
willingly extended credit to the debtor. It is further argued that debts owed to the
exchequer are in substance owed to the community as a whole, and that there is a
broad social interest in ensuring that the business losses of an insolvent not be borne
by the public in the form of a lower tax take. In opposition, it is submitted that
any preferential payments in insolvency come at the expense of unsecured (mainly
trade) creditors, who can oen expect to achieve negligible returns, and that these
creditors are far less able to bear the losses that their debtor’s insolvency may cause.
As noted by the Company Law Reform Committee (the Cox Report) in 1958,
Revenue Preference ‘inicts hardship and injustice on many small creditors’.24 By
contrast, the state as a creditor is uniquely positioned to diversify its losses across
all citizens, such that while the tax losses incurred in individual insolvencies may
be substantial, the burden of these losses is not felt to any great degree by the
public. It is also noted that tax authorities have unique powers of collection that are
unavailable to other creditors (both voluntary and involuntary), and that as such
they are in no need of further protection in the form of a statutory priority.
is article analyses the development of those provisions, and aims to elucidate
how and why we have arrived at the present position, in contrast with our common
18 ibid s 621(2)(a)(vi).
19 Companies Act 2014, s 621(4); there is no nancial ceiling on claims made by farm labourers who
have contracted to be paid their wages in a lump sum at the end of the year of hiring under s 621(5).
20 Taxes Consolidation Act 1997, s 1001; discussed further at Section V.
21 Se e Lynch-Fannon and Murphy (n 12) para 8.131.
22 Companies Act 2014, s 621(7).
23 McCarthy (n 11) 73.
24 Company Law Reform Committee (Cox Committee), Report of the Committee on Company Law
Reform (Pr 4523, 1958) para 202.
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