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Focus on Manufacturing

Insolvencies In The Current Climate

Article 50 of the Lisbon Treaty was invoked on 29 March, formally triggering the two year negotiation process before the UK leaves the EU. What will this mean for insolvencies in the UK?

UK manufacturing has coped well with changes in the financial climate since the referendum result was announced. Recent figures from the Office for National Statistics showed that the UK’s trade deficit in goods and services fell to £8.6bn for the final quarter of 2016, a significant improvement from the previous quarter’s £14.1bn trade deficit. The UK’s position has been greatly improved by a large increase of £1.1bn in exports of goods to non-EU countries. Industrial production also grew by 1.1% in December which included a 2.1% increase in the manufacturing component. Manufacturing output was up 4% on a year earlier, which constitutes its highest growth since April 2014.

There can be no question that the depreciation in the value of the sterling has helped many exporters in the short term. However, there are doubts over the sustainability of manufacturing output in 2017. Theresa May’s speech on 17 January 2017 suggested that a ‘hard Brexit’ was probable which will in all likelihood involve the UK leaving the European single market and the customs union. It is anticipated that increased uncertainty will lead to diminished investment in the UK’s manufacturing industry and the adoption of a more cautious approach by firms in the sector. Coupled with increased inflation and a rise in the real cost of imports of raw materials into the UK, it is expected that manufacturers’ margins will be squeezed in 2017 and the position may well be worsened as the UK edges closer to its formal departure from the EU.

At a recent event we hosted, one of the world’s largest insurers commented that currency depreciation and a decrease in investment in infrastructure was anticipated to be a driver for immediate and medium term insolvencies in the manufacturing sector. Across UK business, it was predicted that there will be an 8.5% increase in insolvencies in 2017 followed by a 6% increase in 2018. However, the expectation was that the UK will feel its greatest knock in 2019 if a ‘hard Brexit’ is to occur; research suggests that in such circumstances, a 15% increase in business insolvencies is anticipated. Such estimates are of course subject to any measures put in place by the UK government to assist businesses through this period of change.

There can be no doubt that a lot will depend on the approach taken by policy makers and negotiators in Brussels and Westminster. There is speculation that the UK may lower its tax rates in a bid to remain competitive with its rivals around Europe, which may increase investment into the UK. It is also clear that Theresa May is clocking up the air miles in a bid to secure advantageous deals with key trading partners outside of the EU such as the US and Turkey. The will appears to be there but the outcome of these discussions remains uncertain.

The management teams of manufacturing companies are advised to take advantage of the opportunities that Brexit has brought in currency depreciation but equally they will need to double their focus on the long-term viability of their businesses. Manufacturers with concerns over the sustainability of their business should take advice at an early stage on the options available, whether that be with a view to entering into a formal insolvency process or not. Solutions available to businesses commonly include a process by which the company restructures its debts by way of binding arrangements with its creditors which simultaneously allow the company to continue trading.

Management teams should be aware that as a company nears insolvency, the duties of directors are owed to the company’s creditors rather than to the company itself or its shareholders. Taking prompt action can and should protect both the business and those running the business.

Published: 16 May 2017

Focus on Manufacturing - Edition 5

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