Preparing for Brexit - Insolvency
As the UK continues to negotiate its exit from the European Union (the EU), businesses and their advisors are looking ahead with a view to minimising the impact of Brexit, regardless of the uncertainties.
At the time of writing, it is by no means clear whether the UK will be able to come to a deal with the EU in relation to on-going trade arrangements or, indeed, whether the UK will remain part of the Single Market after Brexit. Although this makes it very difficult to predict how your business will be affected by Brexit, there are some steps you can take to soften the potential blows.
If your business is primarily conducted in the UK, with other UK-based businesses or customers and does not rely heavily on imports from overseas, it is tempting to assume that you will be sheltered from the effects of Brexit. However, it is likely that all businesses will experience some changes as a result. Not all of these will be negative: for example, the tourism and leisure sectors have been given a boost by the relative weakness of Sterling. This has encouraged overseas visitors to come to the UK on holiday, as well as tempting UK consumers to spend their cash at home.
On a less positive note, businesses may find that their revenue stream is hit not only by their own reduced financial viability, but by a secondary effect of Brexit - their customers may also be struggling. In the immediate aftermath of the 2016 Referendum we saw a number of insolvencies blamed on the "Brexit effect": for example, businesses who were exposed to currency risks or to the whims of overseas investors who developed cold feet.
As the negotiations with the European Union progress and the overall picture for UK plc becomes clearer, we expect that to see more insolvencies caused by similar factors to those mentioned above. If businesses are struggling to cope with the effects of Brexit, other businesses may be affected by the consequent reduction in their order book, bad debts, a scaling back of investment, and a general lack of confidence until the post-Brexit landscape becomes a little clearer.
Brexit and the insolvency world
The UK has a very effective, highly-regulated and well-established insolvency regime and is not wholly dependent on EU membership. Consequently, the vast majority of UK insolvencies will carry on regardless. However, it may become more difficult for creditors to recoup their losses if there is an EU element to the insolvency. Instead of relying on automatic recognition of UK insolvency proceedings in accordance with the EU Insolvency Regulation, insolvency practitioners will probably have to seek recognition in the Courts in each country concerned. That is, unless some form of general agreement with the EU can be reached. This will inevitably lead to an increase in timescales and costs – both of which, ultimately, mean that creditors are likely to be worse off as a result.
Insolvency regimes in other EU countries tend to be more punitive compared with the UK system, which seeks to balance protection for creditors against the need for flexibility for businesses in difficulty. Because our insolvency regime is so highly regarded abroad individuals and businesses have been known to relocate to the UK from the EU and other jurisdictions to "go bust" under our system. This is known in the industry as "insolvency tourism". It is perfectly legal, but the UK may well be a less attractive destination once the freedom of movement of people, goods, services and capital, as enshrined in EU law, is tightened up post-Brexit.
How to protect against the effects of Brexit on my business?
Although it will be some time before we have a full understanding of what life after Brexit will look like, businesses can take steps now to help them weather any storms ahead.
Michelmores' commercial team has already suggested how businesses can protect against the impact of Brexit in their commercial contracts. See Brexit | Commercial Contracts | Michelmores. What else should you be thinking about?
- Take this opportunity to tidy up your debtors ledger and consider whether there will be additional difficulties in collecting debts from EU customers after Brexit.
- Consider changing the way you are paid for your services and goods if your customer is based in the EU. This approach may help to protect you against the risk of having to recover payment without the benefit of EU insolvency assistance.
- Look at ways of protecting your business from any further impact of currency risks, increased tariffs and the practical issues associated with doing business in the EU when faced with the increased administrative burdens. Should you be thinking about currency hedging or maybe engaging "fixers" overseas to help you do business?
- Look at your terms and conditions of business to check whether they give you sufficient protection against matters such as increased trade tariffs or the possibility of your customers becoming insolvent. Do your terms and conditions include a right for you to terminate without incurring further losses if it becomes risky or totally uneconomic for you to continue dealing with a particular customer?
- If you have employees who have come to the UK from the EU and who are working here under the freedom of movement regime, consider whether it will be more costly to employ them after Brexit takes effect. You should also plan for the possibility that employees may wish to return to their home country, or move elsewhere in the EU, and might be difficult to replace.
- Look now at alternative markets for your products and services so that you can plug any gaps caused by Brexit.
- Consider the potential upside – it is easy to focus on the risks when so much remains uncertain, but not all the unknowns will be negative.
The post-Brexit landscape
How different the post-Brexit environment will be is, at this stage, difficult to foresee. It is likely that, even if the result of the Brexit negotiations is "No Deal", we will eventually come to some arrangements with our former EU partners. If the Tiger economies to the East continue on their current trajectory, we may be able to capitalise on our connections there to replace any revenue lost in Europe. The downsides associated with the ease of trading in the EU may be balanced out, or even outweighed by increased freedom from EU regulations and a new-found flexibility to forge our own path in the world.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.