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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