FEATURE: BREXIT – How it could affect Debt Recovery

31st January 2017

FEATURE: Brexit and Debt Recovery

When it comes to Brexit, we’re in unchartered waters. The government has yet to invoke Article 50, and is still working out, and trying to negotiate, acceptable terms.

Prior to the referendum, as a member of the common market, the UK benefitted from over 50 EU-established trade agreements with the rest of the world. As we move from membership to independence, these deals no longer apply, and must be renegotiated. 

There is an increasing number of companies that are trading across international markets, and our clients are regularly asking for solutions regarding the recovery of moneis from EU jurisdictions. While the referendum had an instant impact on the global financial markets, the effects on UK businesses may still take some time to be fully felt. However, recent research suggests that when we do eventually leave the European Union, UK businesses will see a spike in insolvencies, especially those heavily reliant upon overseas clients and markets.

There are a number of different EU regulations and practices that cover debt recovery practices, regarding both consumer and corporate recoveries, from which the UK, as a member state, benefits.  Under the existing legislation there a number of primary pieces of legislation that assist with the recovery of debt, such as:

  • The Lugano Convention – This applies to enforcement actions concerning countries such as Switzerland, Norway and Iceland. It shares similarities to The Brussels Regulation, but the enforcing court has greater discretionary powers.
  • European Enforcement Orders (EEO) – These orders allow member states to treat a judgement awarded in another EU country in the same way as if it has been awarded in their own. The orders can be enforced as if they were a local judgment.
  • The Brussels Regulation – This applies to all member states and is used to enforce complex, non-monetary judgements.
  • Bilateral agreements – These agreements concern Crown states, including both the former and current Commonwealth countries. The judgment made must award a specific sum before it can be registered and enforced in the UK.

Once the UK invokes Article 50 and exits the EU, British companies will no longer be able to rely on the above legislation when it comes to the recovery of debt. In regards to any debts held in the EU, they will fall into the same category as non-EU debts, (the same as those held in countries such as the US). Although these debts will still be eligible for inclusion when filing for bankruptcy, businesses will only be afforded protection from them in the UK.

As the UK’s relationship with the EU changes, and we lose the benefits and the protection afforded by the current legislation, UK businesses will likely find it more difficult to retrieve assets on behalf of creditors, with an increased risk of both delayed and non-payment.

This situation raises a lot of important questions, which will need to be answered in our trade negotiations. Will the EU be willing to create new arrangements? Will it accept the UK under the Lugano Conventions, which applies to countries such as, Switzerland, Norway and Iceland?

As an independent state, the fact is, the UK is likely to be reliant on the EU to create new trade arrangements, with little to no indication as to whether we will receive favourable terms. These new terms would affect how future judgments will be enforced.

There is also the issue regarding the service on defendants, which currently falls under the existing Service Regulation. This is likely to become a more difficult, and altogether slower process. As a non-member state, issues relating to the UK would fall under the jurisdiction of The Hague Convention, which requires each country to handle service reports from outside of the EU, via a central authority.

The reduction in the exchange rate between Sterling and the Euro will see the services and products of UK companies become cheaper, giving the UK businesses an opportunity to increase sales. However, for those businesses dealing in fixed-price contracts, in Euros, an initial increase in profit per transaction will likely be followed by a loss of sales to competitors trading in Sterling. This could result in a situation where companies find it difficult to recover monies – while the pressure for the prompt collection of debts increases – and as customers find new and cheaper suppliers, profit margins will become reduced.

Although, at present, there does not appear to be a visible negative effect on banking relationships or lender behaviour – aside from the general uncertainty about the outcome and impact of the referendum – lenders response to UK borrowers and their debt trading patterns will be one that needs to be closely monitored as the situation evolves and the country strives to negotiate terms.

The net effect of Brexit, even if a satisfactory agreement can be negotiated with the EU however, is that any future arrangements concerning the recovery of international debt are likely to be more complicated, more time consuming and come at greater cost.

Martin Hughes, Head of Commercial Recoveries, Spratt Endicott Solicitors

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