Legislation has come into effect to create a new class of debt in insolvency, being “secondary preferential debts”.

Secondary preferential debts are, in brief, those parts of a deposit which do not fall within the protection of the Financial Services Compensation Scheme (“FSCS”). Typically, parts of a deposit might fall outside of the FSCS because (i) they exceed the cap of £85,000 or (ii) because they were lodged with a branch located outside of the European Economic Area and the new class of debt is intended to address both (i) and (ii).

This extends the changes which took effect at the end of 2014, which made bank and building society deposits covered under the FSCS into preferential debts under the Insolvency Act 1986. Existing types of preferential debts (as extended to include bank and building society deposits which are covered under the FSCS) will now be referred to as “ordinary preferential debts”. Ranking will remain pari passu (i.e. debts within each class will rank equally among themselves, with ordinary preferential debts ranking ahead of secondary preferential debts).

The changes were consulted on during 2014 and came into force on 1 January 2015 under the Banks and Building Societies (Depositor Preference and Priorities) Order 2014 (SI 2014/3486). These changes will affect insolvency proceedings commencing on or after 1 January 2015.