Why insolvent EU clients will be more of a problem

If the media’s Brexit tales about cancelled contracts, shelved investment plans and rumours of corporates upping sticks to leave Britain are true, never has the contractor community needed a fully functioning insolvency and business rescue regime more to provide certainty on debt collection and dispute resolution, writes Nick Hood of Opus Business Services.

The UK has always had a strong presence in the international business community, so many contractors have cross-border aspects to their activities.

The question therefore arises -- what impact will the eventual Brexit have on these vital elements of business? As with every aspect of this historical and unprecedented decision, the answer can be only speculative (at this stage), especially as regards the timing of changes. Positively though, as far as UK insolvency procedures like liquidation are concerned, there will be no impact from Brexit; it’s how we interact with the European insolvency regimes that will be affected.

The EU, the EIRs & COMI

This interaction is governed by the European Insolvency Regulations (the ‘EIRs’), an arcane bit of law generally only of interest to insolvency nerds. It sets out how cross-border business failures are dealt with, and enables an insolvency filing in one EU member state to be recognised in another. It allows a UK court and a UK insolvency practitioner to get directly involved in an insolvency in France or Germany, for example.

The importance of this is that the UK is generally considered to have one of the most efficient and creditor-friendly insolvency regimes in the world, so a struggling company somewhere in Europe has been able to get access to our system, which can help UK creditors or business partners to have a far greater say in the outcome. This in turn encouraged many European businesses to have a legal presence -- what the EIRs call their COMI (Centre of Main Interest) -- in the UK.

In theory any Brexit deal could include provision for the UK to retain its previous rights under the EIRs, but insolvency is rarely a political priority so nobody really believes this will happen. So unfortunately for ContractorUK readers, we predict that UK contractors trying to get their money back from insolvent EU clients will be faced with significantly higher legal barriers and costs.

Pulling up the insolvency drawbridge

It also means that EU businesses based in the UK could see the EIRs issue as another reason to pull back across the Channel. Another potential problem may be that EU clients or service providers may want contracts to be written in future under their local legislation rather than English law, which would be a seriously retrograde step. Good luck to any contractor whose debt recovery prospects or performance obligations become subject to the vagaries of French employment law, Italian commercial decrees or the Spanish insolvency regime!

Another aspect of Brexit with commercial implications is that leaving the EU changes the UK’s relationships with many other countries beyond Europe, so that any commercial protections we had before may disappear. Some counter that these, in time, will be bolstered.

Either way, when might all this happen? Crystal balls have been known to cloud over from easier questions. However the departure of some European businesses from the UK is already underway, even though the likelihood is that the divorce proceedings will take a minimum of two years but, in this commentator’s view, it’s probably more like a decade.

In the meantime, contractors need to watch the actions of any international clients like a hawk, making sure they’re not the last to know when something important is going on with their business, or affecting it. They also need to be very cautious about the UK industries that look like they’re going to be hardest hit by the Brexit decision. Construction is already feeling some serious pain, along with Property. Financial Services is another potential victim, as are Travel or Holiday operators. Across the economy as a whole, there will of course be winners but business rescue experts tend to agree -- they’ll probably be more losers, overall, but especially in the four said-industries. So try to make sure you’re not owed three months’ money by any outfit operating as one of these four. And if you’re contracting overseas, and do run into a problem in Europe, get professional advice and get it early.

Your PSC isn’t an island

The reasoning behind this piece of advice is clear and actually unaffected by Brexit -- the decision last month or the eventual exit. It’s because business failure, often brought on by cashflow issues, continues to impact contractors in all sorts of unexpected ways. Remember dear contractor that, unlike the UK your business is not an island. And exactly like the UK’s insolvency regime, which is entwined with many rules which themselves are linked to the EIRs, problems for a client can devastate your income and cashflow; as those problems often have their roots in one of your client’s clients, suppliers or service providers. So regardless of whether your client is small, medium or large, your ‘due diligence’ checks just came into their own.

Editor’s Note: Related Reading –

How IT contractors can employ due diligence – part 2

Contractors’ Questions: How to get paid for work my ex-client is using?

Contractors’ Questions: How to invoice a client overseas?