721.The White Paper ‘Productivity and Enterprise: Insolvency – A Second Chance’ made a commitment to abolish the Crown’s preferential status in insolvency, and to ensure that the benefit went to unsecured creditors for companies that have given floating-charges after the provision has come into force.
722.As a preferential creditor, the Crown can currently claim its debts from an insolvent company or bankrupt estate ahead of secured creditors, who hold a floating charge, and unsecured creditors. The Crown’s preferential debts are described in sections 386 and 387 of, and Schedule 6 to, the Insolvency Act 1986, and include arrears of PAYE, NIC, and VAT for the following periods:
	debts due to the Inland Revenue for 12 months prior to the relevant date (category 1 of Schedule 6);
	debts due to Customs and Excise for the 6 to 12 months prior to the relevant date (category 2 of Schedule 6);
	social security contributions for the 12 months prior to the relevant date (category 3 of Schedule 6)..
723.The Act will abolish the Crown’s preferential status.
724.The relevant date is defined by section 387 Insolvency Act 1986.
725.Preferential status will remain for:
	contributions to occupational pension schemes (category 4);
	remuneration of employees for the relevant period (category 5); and
	levies on coal and steel production under the European Coal and Steel Community (ECSC) Treaty.
726.In addition, Schedule 17 removes section 189(4) of the Employment Rights Act 1996. As a result, the Secretary of State will no longer be paid in priority to any remaining preferential claims lodged in the insolvency proceedings by former employees. The Secretary of State will remain a preferential creditor where he has “stepped into an employee’s shoes” and made payments from the National Insurance Fund to cover all or part of any employee’s preferential claims.
Commentary on Sections General provisions Sections 251 and 252: Abolition of Crown Preference & Unsecured creditors