Liability & indemnity

Preparing for Brexit: The insolvency risk

As the UK continues to negotiate its exit from the European Union (EU), business owners and their advisors are looking ahead with a view to minimising the impact of Brexit, regardless of the uncertainties, writes Anna Thompson, associate at Michelmores LLP.

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.

Domestic implications

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.

Read more: The difference between insolvency, liquidation, bankruptcy and administration

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 EU 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 tourism

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 can I protect my business against the potential Brexit insolvency risk?