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Focus on Manufacturing

Will Brexit Trigger an Increase in Insolvencies?

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 manufactured goods.

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 processes

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 post-Brexit?

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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