BREXIT: Expect a rise in insolvencies in light of vote, says expert

This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist.

Nicholas Pike of Pinsent Masons, the law firm behind Out-Law.com, said there will be an "inevitable" increase in the number of businesses entering administration or a period of financial distress in industries such as retail, house building and travel industries if consumer spending falls in light of the vote.

Since the UK voted to leave the EU there has been uncertainty over the timing of and terms on which the UK will formally exit the trading bloc and what its future trading relationship will be with EU countries and the wider world.

Until those issues are resolved, or at least a clear path forward identified, businesses are likely to be cautious about making investment decisions and consumers likely to defer major spending, Pike said. This could spur an economic downturn with consequences for the viability of some companies, he said.

"The economic effects of the UK's decision to leave the EU are still to be fully felt," Pike said. "There will remain arguments over whether the result of the referendum will benefit or be detrimental to the UK economy in the long term but the immediate uncertainty stemming from the result is not good for financial markets or business in the short-term."

"A lack of business and market confidence is likely to translate eventually into more cautious consumer spending, as the public wait to see how Brexit will impact on jobs and interest rates, for example. A drop-off in consumer spending would have a particular impact in industries reliant on the discretionary spend of the public. Retailers, house builders, airlines and holiday companies could be among those most affected," he said.

"It is inevitable that we will see a rise in the number of businesses entering administration over the coming months. Small companies are likely to be most at risk of insolvency as rescue packages are less common than where bigger brands are affected. Although there is no sign of consumer spending dropping off at the moment, there are already anecdotal reports of businesses putting transactions and investment deals on hold in the aftermath of the vote and this has the potential to start impacting on consumer confidence and spending. It might be that we start to see the first true effects of Brexit on consumer spending during the final quarter of this year," Pike said.

Pike said that businesses under increased financial pressure could seek to place greater control on costs, including by applying freezes on recruitment, banning staff overtime, negotiating salary reductions with existing employees or moving them on to part-time hours. He said those measures were deployed by many companies during the recession of 2008 and represented a different approach to that of making mass redundancies which was "the hallmark of the recession in the early 1990s".

Pike said that the Bank of England has a "difficult path to tread" in creating favourable conditions for business growth in the current political and economic climate. The low value of the pound is increasing the cost of imports and may lead to a rise in inflation, which could impact on consumer spending, he said. However, he said many businesses would be against any rise in interest rates to dampen that inflation due to the increased costs they would incur as a result, and with interest rates set at 0.5% at the moment there is little freedom for the Bank of England to reduce rates further to encourage spending.