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Debt Collection

Brexit: How it could affect the recovery of international debt

By CreditMan Tuesday, January 31, 2017

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By Martin Hughes Head of Commercial Recoveries, Spratt Endicott Solicitors

The referendum on Britain’s membership of the European Union, and the subsequent vote to leave, has forced the government to navigate unchartered waters.

As a member of the single market, the UK was a beneficiary of more than 50 established trade agreements between the EU and the rest of the world. As the UK moves towards independence, these deals no longer apply. The government must now work to renegotiate these deals prior to invoking Article 50 and finalising the country’s exit.

So, how will the UK’s exit from the EU affect the recovery of international debt? Well, an increasing number of businesses are trading regularly across international markets, and our clients are always seeking solutions regarding the recovery of monies from EU jurisdictions. While the result of the referendum had an instant impact on the global financial markets, it may take some time before UK businesses feel the full effects. Recent research, however, suggests that when we eventually leave the EU, British businesses will see a spike in insolvencies, particularly those reliant upon overseas clients and foreign markets.

In regards to debt recovery, there are various different EU regulations and practices that cover both consumer and corporate recoveries, from which the UK currently benefits. The primary pieces of legislation that assist with the recovery of debt, are as follows:

  1. 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.

  2. The Brussels Regulation – This applies to all member states and is used to enforce complex, non-monetary judgements.

  3. 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.

  4. 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.

As soon as the UK invokes Article 50 and begins the process of withdrawing from the EU, British companies will no longer be protected by the above legislation when it comes to matters of debt recovery. Debts held in the EU will fall into the same category as non-EU debts, (the same as those held in countries such as the US). While such debts will remain 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.

Our exit therefore 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 country, outside of the common market of which we’ve for so long been a part, 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 could 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 sure 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 the Euro, the initial increase in profit per transaction will likely be followed by a loss of sales to competitors trading in Sterling. This could cause difficulties for companies trying to recover monies. As the pressure for prompt collection of debts increases, and as customers find new and cheaper suppliers, profit margins will likely become reduced.

At present, there does not appear to be a visible negative effect on banking relationships or lender behaviour. However, lenders response to UK borrowers and their debt trading patterns will need to be monitored, as the situation evolves and the UK strives to negotiate terms.

The net effect of Brexit, even if a satisfactory agreement can be negotiated with the EU, 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.