Will Brexit bring more insolvencies? BLM answers

Will Brexit bring more insolvencies? BLM answers.

We have seen instances of business failures being blamed on Brexit, but do the statistics back it up and is this a sign that Brexit will cause a spike on the insolvency graph?

Figures recently released by The Insolvency Service have shown that in 2019, company insolvencies increased to their highest annual level since 2013. This is noteworthy, but still below anticipated levels. There are no signs of an epidemic just yet.

Reasons why business fail

We also know that approximately one in four start-ups will fail within a year, half of them within four years. The reasons for failure are many and varied; they include the wrong business model, lack of planning, lack of execution, negative cash flow, disagreements over direction, inadequate demand, heavy initial expenditure, even loss of energy or motivation.

Types of business that fail

But failure is not the sole preserve of new market entrants; as we have seen in recent years, a declining trend in the high street retail sector has seen the demise of established businesses that have traded for decades, and in some cases, centuries. In the world of business today, things change, often at a frightening speed.

Is Brexit to blame for businesses failing?

Against this backdrop there is a new factor, arising since the referendum since 2016, which has entered the discussion – Brexit. At the time of writing, the UK has just exited the EU, but things will remain relatively unchanged until the end of the transition period, which will be 31 December 2020. By that time, subject to any further extensions, the Government’s expectation is that there will be a negotiated deal, which will shape the future trading and regulatory relationship between the UK and the EU. As things stand, therefore, in the context of insolvencies it has been the threat of Brexit, rather than the final formality of it, that may have caused uncertainty and affected business confidence.

This makes it difficult to single out Brexit as the predominant reason for increased company failures. For starters, there is no “Brexit box” for directors to tick when submitting their questionnaire to a liquidator. Even if there were, this would reflect opinions, not necessarily backed by compelling evidence. We also do not know what, in terms of a deal, Brexit will constitute at the moment, so is it premature to use it as a default excuse for what was otherwise a viable venture?

Norton Motorcyles' administration

If we look at the recent administration of Norton Motorcycles, the position appears more nuanced. Norton had been under pressure for some time and it is accepted that its financial problems would have been exacerbated by Brexit. For example, potential funders may have been concerned by Brexit uncertainty. The former owner is reported to have said that ‘Brexit … kicked us up the backside’. But at the same time, the reports are that Norton had other significant systemic issues that existed outside the Brexit bubble.

Is Brexit uncertainty to blame for recent business failures?

There may be some businesses that have failed due to Brexit uncertainty, for example those who stockpiled goods as a hedge against a no-deal Brexit, causing significant and possibly terminal cash flow issues. Businesses that are, say, importing raw materials and exporting manufactured products to the EU are grappling with tariffs, increased regulation, issues of funding availability, delays and costs that the prospect of Brexit and any final Brexit deal may bring. There again, the UK business landscape is challenging, with low growth but a growing tax burden. The insolvency statistics speak for themselves – even though all businesses may be affected to some extent by Brexit, does that exclusively explain the upward trend?

Which sectors have been hit hardest by insolvency lately & why?

If we look at the hardest hit sectors in the last quarter of 2019, these were headed by the construction industry. The wholesale and retail trade and repair of vehicles grouping was next. Looking at construction, there have been shortages of skilled labour, normally sourced from the EU, due to concerns over changes in immigration regulations post-Brexit and the weakness of sterling, causing UK incomes to drop in real terms against the euro. The industry also imports a significant amount of materials, again made tougher by a weaker pound. With a car maintenance business, even if it serves only domestic customers, the replacement parts required might be manufactured in the EU, or imported via the EU, with the same cost consequences. On the flip side, retail businesses on the UK High Street have grappled with technology challenges through online competitors, along with high rents and business rates, with Brexit thrown in more at the side or end of the argument.

Tell-tale signs that a business is in distress...look out for 'zombie companies'

In terms of the tell-tale signs of a business in distress, whatever the underlying reasons, it is vital that you watch out for these. Keep an eye on longer delays in getting your invoices paid, credit terms being negotiated, future orders dropping or news of redundancies. Focus also on the supplier negotiating payments up front or on delivery when the course of dealing was not previously the case. Never assume that the company you have been dealing with as a customer or supplier, without previous controversy, may not suddenly be putting your business in danger. You may well be prepared, but what about the overall supply chain? Beware the multitude of “zombie” companies that hang by the thinnest of threads.

 

Seek professional advice early - move from business collapse to a business that thrives

If there are signs that your own business is under financial stress, be this through customer or supplier failures, or significant claims, rising costs and below projected income, don’t let it fester. Seeking advice on the state of your business at an early stage may turn it around. With independent professional input you can focus on profitable areas of the business, discontinue unprofitable areas, make sensible cost cutting measures, arrangements with creditors and a general steer on restructuring your business. From the threat of collapse may come the opportunity to thrive, with your business in a better shape.

Is there really a Brexit effect for failing businesses?

So is it too easy to be pessimistic about the effect of Brexit on the solvency of UK businesses? Remember the Millennium Bug; it passed by with barely a whimper. It is hard to have a control group for UK industrial sectors, as all businesses will be affected to some extent by Brexit. We can see that some sectors, for example construction, have already been affected by Brexit before any deal has been finalised. But at the same time, this should not mask systemic failures in businesses that were going to the wall regardless of Brexit.

We must also take into account the brighter side of the argument, where proponents of Brexit foresee increased investment, economic revival, a strengthening pound, a “good” deal with the EU and of course, over time, new trade deals with non-EU countries. These may, individually or collectively, move the insolvency dial in the opposite direction. If that’s right, then any short term increase in insolvencies may see a counterbalancing decline thereafter.

Avoid the spectre of insolvency - be prepared

But for most businesses, both before and since the referendum, whilst business failures are not always based on finances, bottom lines are usually the core issue. Cash flow tends to kill businesses, not profitability. The spectre of insolvency for a business is therefore real and for most businesses, never that far away, Brexit or no Brexit.

 

BLM’s insolvency team is here to help you whatever the scenario for your business. Contact one of our team for expert legal advice.

 

 

Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.