In many areas the consequences of an exit from the EU seemed obvious. Family lawyers would see rising divorces with couples separating over political arguments. Transactional lawyers would see a slow in work as clients became more reluctant to take bold investment decisions while facing an uncertain future. Immigration lawyers would be retiring on the amount of work generated for them by Mr Farage and his friends. Now that is, of course, all said tongue in cheek but the same temptation to exaggerate the effects of an EU exit exists in my own areas of practice and, in particular, insolvency. Would an EU exit mean the demise of more Scottish business brought on by consumers being unwilling or unable to spend? And what would the effect of an exit be on insolvency proceedings more generally in Scotland.
The most obvious legal effect is regulatory. EU Council Regulation 2015/848/EU on insolvency proceedings provides for the mutual recognition of insolvency proceedings throughout the EU. EU Council regulations have direct effect in the EU member states and there are, therefore, no national legal provisions transposing them into national law, as there would be with EU Council Directives. Accordingly, a no deal exit from the EU would mean that these regulations automatically cease to have effect without the need for any legislation. Obviously such a dramatic change in the law overnight is unpalatable as it would lead to huge uncertainty for the insolvency profession.
So earlier this year, on 13 March 2019, the Scottish Ministers made the Insolvency (EU Exit) (Scotland) (Amendment) Regulations 2019 which will come into force on exit day. They are presumably intended only to apply in the event of no deal or a deal which does not provide for a more structured transition of legal regimes. The regulations effectively repeal the current EU regulations and bring the UK's relationship with the EU member states in line with the relationship that it has with non-EU states. The regulations impact on both corporate and personal insolvency making changes to the Insolvency Act 1986 and the Bankruptcy (Scotland) Act 2016 (although the removal of Member State liquidators and temporary administrators from the picture is not going to make much of an impact to the every day lives of those practising in personal insolvency work).
The most profound and inevitable effect of the regulations is that EU insolvency proceedings will no longer be automatically recognised in Scotland. While that does not mean that recognition and/or enforcement of insolvency orders from other EU states won't be possible, it will undoubtedly make that process more difficult. The regulations also remove existing restrictions on opening insolvency proceedings where the centre of main interest is in an EU member state but retain the jurisdictional test based on centre of main interest as an additional ground for jurisdiction to open insolvency proceedings.
It is possible to over-state the effect of withdrawal on the insolvency of Scottish companies or individuals. Most insolvencies will involve assets situated entirely within Scotland and these insolvencies will be largely unaffected by the regulatory changes. The main impact will, of course, be on cross-border insolvencies. However, many cross-border insolvencies in Scotland will involve assets in England or other parts of the UK and will, therefore, be unaffected by an exit from the EU. In the few high value insolvencies where assets are situated in EU member states, it can be expected that recognition and enforcement will be a little more difficult. Even there, however, it ought to be remembered that it is only 18 years since EU Council Regulation 1346/2000 came into force providing for mutual recognition between member states. Before then (and before my time in practice!) everyone managed without them and no doubt will adapt to doing the same again.
The regulatory picture is, however, only one side of the coin. The other is the actual impact that exiting the EU will have on business and individuals. Figures suggest that following the vote to exit the EU, company voluntary arrangements went up by 16 per cent in 2018 compared with the previous year and compulsory liquidations went up around 11 per cent. Personal insolvencies also increased in Scotland and England & Wales. Whether these increases are directly or indirectly the result of the vote to leave the EU is, of course, open to question. Many of the CVAs and corporate insolvencies were in the retail sector which is suffering due to reduced consumer spending, a consequence perhaps of the continued financial pressure on families. However, in a very interesting article in the Times newspaper recently, Julie Palmer of Begbies Traynor gave a more deeply ingrained reason for the failure of business:
"People in their 20s and 30s lead more portable lives, and are less interested in accumulating CDs, DVDs or even clothes. They are less materialistic, tend to everything on their mobiles, tablets or the cloud. We're seeing the effects of that very dramatically in retail".
So attributing an increase in the insolvency market to an exit from the EU might be a false assumption. There are other factors at play in the economy (many being sector specific) which have a real impact on the trends we see in practice. Most recent figures suggest that there will be 26 per cent rise in insolvencies following an EU exit. If that's accurate then it's a stark indicator of what lies ahead for many businesses. For these businesses, preparing for an exit is essential. Very small changes in client behaviour need to be taken seriously and, in particular, businesses need to take quick action where a client unusually starts to delay in paying fees. These small changes in behaviour by clients or customers can be indicators of a much bigger problem. Early debt collection will be key.
But that will not be enough for some. A recession or even a more gentle economic downturn will spell the end for some businesses, regardless of how well-prepared they are for it coming. However, for some, a recession will be an opportunity. Innovative businesses who are well-prepared can take advantage of the downturn and get a step ahead of the competition, particularly if the competition ceases to exist. So, I'll end with a suggestion. Do what no-one expects. When competitors are making staff redundant, invest in the best people. When competitors are selling land, invest in prime real estate. Look to the future because, if you do, you're probably more likely to have one.
Richard McMeeken is a Partner and Solicitor Advocate on the litigation team at independent Scottish law firm Morton Fraser.
