• 22 August 2019
  • Accountancy

We need to talk about Brexit... how will UK insolvency be affected?

With the new Prime Minister’s promise of Brexit on the 31st October regardless of a deal, every industry in the UK is taking time to look at itself and wonder - “what would a no deal Brexit mean for me?”. Insolvency is no different.

What effect has it had so far?

The last 12 months have seen consecutive high street household names fall victim to ever increasingly bleak retail conditions. Of course, this can’t be blamed solely on Brexit, but it certainly hasn’t helped. 

Changes to spending habits in recent years, most notably the decline in traditional high street retail and boom in the online market which is forecasted to rise to contribute 53% of all retail sales in the next 10 years*. This in itself is weeding out firms lagging behind with modernisation and online presence. 

In addition, a weakening pound sterling has also contributed; falling by 19% since 2017’s referendum result, this has caused a knock on effect and a creeping increase in inflation**.

It would seem, therefore, that the need for insolvency professionals is only going to increase, as suggested by the rise in company insolvencies recorded by the Insolvency Service over the 2nd quarter of 2019***.

So what might change for the UK insolvency market going forward?

We’re crucially at a moment where no-one can be quite sure what changes might come, however, in the wake of a lack of new deal negotiations and the looming exit deadline, a couple of outcomes can be inferred.

Legislation 

The first, and arguably the most influential, shift will be a move away from the current EU legislation. 

Two key policies currently underpin Insolvency practice for any company or person operating with overseas assets: The European Insolvency Regulations and The Recast Brussels Regulations. 

These policies ensure the appointment of an administrator, liquidator, or trustee in bankruptcy within one EU member state is recognised in others. This allows for court judgments made in one member state to be automatically recognised, and therefore enforceable in the rest of the EU.

What does this mean?

Separating the UK from its European neighbours will effectively add additional stages to the process currently used by insolvency firms as legislation to force co-operation. This will ultimately add additional costs to the process, driving down possible returns to both firms and creditors.

In addition to these added costs, firms will potentially be faced with reduced resources with which to investigate possible fraud, or other avenues, in the event of an overseas process.

Ultimately, the reality facing UK insolvency firms is one of increased costs, leading to lower possible returns, not just for them but also for other creditors. 

Paired with the changes to the status of HMRC which have brought them to 3rd on the list of prioritised creditors, this means forecasted returns for suppliers would also be at risk of diminishing. This change therefore not only boosts the risk for insolvency practitioners, but for all creditors and suppliers going forward.

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https://www.theguardian.com/business/2019/jul/09/half-of-uk-retail-sales-will-be-online-within-10-years-report-predicts

** https://www.finder.com/uk/brexit-pound

*** https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/821413/Commentary_-_Company_Insolvency_Statistics_Q2_2019.pdf

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Alice Cahill is a Recruitment Consultant in the Accountancy Division at Harvey John.

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