An impending test case could see council business rate charges paid ahead of administrators’ remuneration, in a move that could return UK insolvency proceedings to practices dropped 20 years ago.

The case, to be heard in the new year, involves Exeter City Council’s fight for payment of non-domestic (known as 'business') rate arrears from the administrators of Trident Fashions.

The issue of whether administrators should or should not pay business rates has proved to be highly contentious. Some administrators will pay business rates if there are enough funds available.

If not, then business rates are usually considered non-preferential and fall by the wayside.

If the council wins the claim, then administrators could end up out of pocket when managing businesses with multiple sites, such as retailers, due to business rate costs.

The precedence of business rates over adminstrators’ remuneration was dropped in the 1986 Insolvency Act, and reverting to it could put pressure on practitioners managing struggling retailers.

Business recovery experts might then shy away from handling multiple-site businesses all together, some have suggested.

Solicitors for the administrators could argue that a decision in favour of the council would fly in the face of the Enterprise Act, which puts attempts to save struggling businesses on a par with the interests of creditors, according to Carolyn Swain, partner in the insolvency practice at Halliwells.

‘Parliament saw fit to drop the creditor status for business rates in 1986, and this point could also be argued by administrators,’ she adds.

Swain suggests that business recovery experts would attempt to sell more retailers through pre-packs – where the sale of the business is arranged prior to administration – in an attempt to avoid accruing business rates in an ongoing administration. ‘There is the risk of administrators having to pay these expenses in the future.’