The effects of Britain’s decision to
leave the EU so far are more positive
than experts predicted but uncertainty
still reigns in a manufacturing market
which is in need of stable growth. Pre-referendum predictions and the story so far
Before the referendum occurred, it was anticipated that
manufacturers with a heavy reliance on exports could be
pushed over the edge if Britain were to exit the EU.
The dust continues to settle after the outcome of the
referendum was confirmed. A survey carried out by the
business lobby group the CBI showed that the decrease in the
value of sterling resulted in a material increase in exports of
The Markit/CIPS UK Manufacturing PMI survey confirmed the
increase in exports up to July, which they also put down to a
decrease in the value of sterling in addition to the efforts of
businesses to secure new contracts.
However, the same survey showed that UK manufacturing
employment decreased in July for the seventh straight month,
job loss was at its most severe for over three years, and the
rise in import costs and higher metal and commodity prices
is leading to material purchase price inflation. There are
suggestions that large players in the steel and retail sectors
are taking steps to move operations to other countries within
the EU and it is very possible that this could lead to a host
of businesses within the UK falling into formal insolvency
processes unless these businesses can take advantage of any
opportunities that arise in a post-Brexit world.
Avoiding insolvency and formal insolvency
There are certain practical steps which manufacturing
businesses can take to minimise the risk that they fall into an
insolvent position or become victim to a contractor’s financial
woes. Such steps include cost minimisation, implementation
of formal credit control processes, periodic due diligence on
key customers and suppliers, and implementation of express
protections within supplier contracts and customer contracts.
It is essential that if businesses fear that they or their key
suppliers or customers may become subject to financial
difficulty, they take professional advice at an early stage.
The features of the insolvency processes most commonly seen
in the manufacturing industry are as follows:
Company Voluntary Arrangement (CVA): a formal, binding
agreement between a debtor company and its creditors
for the repayment of all or a portion of their debts over a
prescribed period of time (typically no longer than five years).
This arrangement is supervised by a qualified insolvency
practitioner and allows the debtor company to continue to
trade rather than entering into liquidation, which often results
in a worse return for creditors.
Administration: a process for the benefit of all creditors,
which allows the debtor company breathing space by virtue
of a temporary ‘moratorium’ on legal proceedings being
commenced or continued against it. Administrators may
look to trade the insolvent business and / or they may seek
to market and sell the business. Certain administrations can
involve a sale of the business and assets of the company to
the management team or a third party, which can preserve
the business, and the position of the company’s employees.
Liquidation: a process whereby a company’s assets are
realised by a qualified insolvency practitioner into their
cash value and the realisations are distributed to creditors
of the company subject to the statutory order of priority
in insolvency. In liquidation, just like in administration, the
liquidator will examine the directors’ conduct, and take
action against them if appropriate.
What will the insolvency world look like
Unfortunately, it currently remains impossible for any
practitioner to provide a substantive answer to this question
because politicians in Whitehall and Brussels are still scratching
their heads as to precisely what form Brexit will take because
there is simply no precedent for this situation. Once the UK
gives notice to the EU under Article 50 of the Treaty on the
European Union, this triggers a two-year formal negotiation
process before the UK’s exit from the EU is completed unless
an exit agreement is reached before the
two-year period expires.
It is likely that the UK would wish to enter into a bespoke
agreement with the EU regarding the recognition of insolvency
proceedings between the UK and EU Member States, and this
would most logically be achieved by allowing the continued
application in the UK of the EC Regulation on insolvency
proceedings (a regulation which provides uniform rules on,
and mutual recognition of, insolvency procedures amongst
member states (other than Denmark). However, such an
agreement would need the consent of all EU Member States,
and it is unlikely that the UK will be given an ‘easy ride’ in
negotiations so the situation will need to be closely monitored.
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