Having lost their preferential creditor status in 2003 HMRC has increasingly used 'distraint' to recover monies due. They also appear to be hardening their stance when it comes to withdrawing from distraint. So it is more important than ever to take legal advice as soon as you become aware of any threat from HMRC to distrain.
In contrast to the position of a judgment creditor who has not yet completed his enforcement with a sale, distraint is considered to be complete at the time that walking possession of goods is taken and not at the time of sale of the goods distrained over.
The position of HMRC is that through distraint it acquires a “special interest” in the seized goods; akin to a form of security: the distress forming a pledge as security for the debt. They state that paragraphs 43 and 44 of Schedule B1 to the Insolvency Act 1986 (the moratorium provisions) merely suspend the distraint and do not put an end to it, and at the same time threatening actions such as pound breach for interference with distrained goods and seeking assurance that the proceeds of any sale will be accounted for to them in priority to other creditors. An administrator who is looking to sell such assets for example in the context of a business sale, should get consent or seek leave of Court (para 71(1) Schedule B1 Insolvency Act 1986).
There is little in the way of case law on the “special interest” point. Two cases frequently quoted by HMRC are Jeffrey Mark Brenner v HMRC  EWHC 1611 (Ch) (sub nom Modern Jet Support Centre Limited), a liquidation case and Herbert Berry Associates Limited Ltd v IRC  All ER 161 support the stance taken by HMRC.
In these cases it is important to look at the terms of any floating charge where one exists over the relevant company’s assets. A well drafted floating charge will crystallise on the mere threat of distraint; meaning that the assets become subject to fixed charge long before HMRC have entered into any walking possession agreement and in which case HMRC are generally willing to concede their position. HMRC’s position regarding third party assets, unlike a landlord who is entitled to distrain over all goods at the premises, including third party goods (subject to right to seek relief under the Law of Distress Amendment Act 1908 does not extend to any third party goods and is limited only to goods owned by the debtor which for these purposes do not include goods subject to a crystallised floating charge.
It is important to take legal advice as soon as you become aware of any threat from HMRC to distrain. Left too late there may be little if anything that can be done to defeat any claim for priority.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.