Six years after its introduction, the Prompt Payment Code seems to have fallen by the wayside as a growing number of SMEs are paid late. Brendan Clarkson, head of national creditor service team at Moore Stephens, says the Code needs more bite to protect smaller businesses
Head of national creditor service team
The Prompt Payment Code was established in 2008 to improve SMEs’ financial stability by helping them to recover billions of pounds of late payments owed to them faster. However, six years on, research shows that the Code has not lived up to expectations.
The problem is that these government guidelines are lacklustre and have no bite. Being a voluntary code it has no consequences and therefore, in many minds, has no real value in its current format.
Recent figures released by BACS show that the problem is only growing and the fact that, to date, the Code only has around 1700 signatories out of a possible 4.9 million businesses is a genuine worry.
The government has made promises for change and draft legislation has now surfaced that will eventually force companies to publish more information about their payment terms, in the hope this will embarrass businesses with their own less than favourable terms being more transparent.
The Code needs teeth and that means statutory status with actual penalties for failure to adhere to it. This would be a big step forward in addressing the government’s constant pledges of support to the small business sector. Figures released from the Asset Based Financial Association (ABFA) recently show that small businesses are paid 23 days later by customers than bigger businesses. This is backed up by research this summer from Bacs Payment Schemes, which found that small and medium-sized companies are owed nearly £40bn as a result of late payments which is ultimately threatening their solvency and their future.
In addition to setting penalties of real consequence, the Code must also give rulings not guidance of what is deemed fair as payment terms. This will not be easy as every sector will have its own issues and worries but with the support of the Institute of Credit management (ICM) spearheading this, there is real hope that round table discussions can begin.
The ICM has been both hosting and administering the Code. As a supporter of it, they are determined to be seen to be pushing the Department for Business, Innovation and Skills (BIS) to get this right. The ICM have launched a Construction Supply Chain Payment Charter which has gained considerable momentum. Chief executive of the ICM, Philip King, has recently spoken out about the need to tighten the Code and indicated in a BBC Radio 4 interview that he would be disappointed if no change took place in the next three months.
Businesses should be able to challenge unfair contract terms without risking individual supplier contracts or relationships under new directive. This could be enforced by clause (article 7.5) in the EU Directive on late payments which has, for some reason, been omitted from the Code.
It is not fair that only large businesses prosper as the economy returns to growth – small firms need a robust framework in which they can confidently charge interest and complain about late payments, without the fear of losing future work which will harm their underlying business.
Despite having failed in many ways, as the economy now recovers, the government now has a second chance to sharpen those teeth to give them real bite.
Darren Toms, director at Clumber Consultancy, shares a technical breakdown of the often problematic Section 120 of the Pension Scheme 2004
Section 120 of the Pensions Act 2004 is a continuing administrative headache for insolvency practitioners and the latest findings have highlighted a dangerously growing trend of just relying on the Pension Protection Funds online facility to find a company pension scheme.
The Pensions Act 2004 came into play in 2005 and with that came the launch of the Pension PPF, a compensation scheme for Defined Benefit (Final Salary) pension schemes, where the sponsoring employer suffers an insolvency event. Since its inception, the Pension Protection Fund has paid out £793m in compensation.
IPs have a statutory duty under s120 of the Pensions Act 2004 to notify the Pension Protection Fund (PPF), the Pensions Regulator (TPR) and the Scheme Trustees about their appointment to an insolvent employer where the employer had an occupational pension scheme.
This statutory duty has to be complied with within 14 days of the insolvency appointment or within 14 days of becoming aware of a pension scheme. Upon receipt of the s120 notice the PPF will determine whether the pension scheme and its members are eligible for compensation. As at 31 March 2013, the PPF had a further 223 pension schemes in assessment with assets of £5bn and liabilities of £6.5bn.
To assist IPs, the PPF devised an online s120 facility that can detect any Trust Based registered company pension schemes. In principle this was a saving grace for IPs as the difficulty with company pension schemes is actually finding them in the first place. However, it transpires that some IPs are over reliant on the PPF’s online facility and overlook the statutory requirement to submit an s120 notice for a pension scheme that subsequently emerges where the PPF online facility failed to find a scheme.
To complicate matters for IPs the PPF have confirmed the following on their website: “If you are aware of a defined benefit scheme being associated with this employer and it is not showing in your online search please submit a paper s120 notice. “This is fraught with danger for a number of reasons: firstly, it is not clear to an IP when finding a pension scheme whether it is defined benefit or defined contribution and, secondly, there are hybrid pension schemes out there that can appear to be defined contribution schemes but actually have a defined benefit element to them.
The statutory obligation to s120 remains unchanged and states that an IP should still complete an s120 notice for “all” occupational pension schemes as it is not the role of the IP to determine whether the scheme is defined benefit, defined contribution or a hybrid pension scheme eligible for entry into the PPF.
To ensure that IPs don’t fall foul of their statutory obligations it is recommended to complete the s120 notification online within 14 days of their insolvency appointment and then download, complete and submit a paper s120 notice form for any other company pension schemes that are subsequently found.
Following the release of today’s statistics from The Insolvency Service for the second quarter of 2014, Insolvency News presents a round-up of reactions from leading industry figures.
Source: The Insolvency Service
Philips Sykes, R3 vice-president
“While administrations and voluntary arrangements have remained at a pretty constant level for the past five or so years, liquidations have fallen gradually since the recession. Although there has been the occasional quarterly jump, things have always fallen back again the next quarter.”
“Other than an improving economy, not much has changed to have a big impact on insolvency numbers. Some sectors, like the legal sector have encountered regulatory challenges, which has led to higher insolvency numbers there, but for everyone else the past few years have been the same story: low interests rates and lenient lenders.”
“An interest rise could cause some businesses extra problems, but it would have to be more than a couple of quarters of a percentage point to make any real difference.”
Clive Lewis, head of Enterprise at ICAEW
“The fact that company insolvencies continue to fall, and are lower than they were a year ago, is a significant step toward a more stable economy. With the number of companies entering voluntary liquidation at the lowest level since 2008, business survival rates have come a long way since the recession. However, we do expect an increase in insolvencies when interest rates rise, particularly if companies have been overtrading because of the rapid growth in the UK economy.
“Our economic forecast tells us that the UK economy is expected to grow by 3.4% this year, twice as fast as the growth seen last year and up from our previous projection of 3.3%. But we are still in a fairly early stage of recovery. Businesses expect most growth over the next year to be domestic sales rather than exports, so this is not a trade-led recovery. In addition, many businesses report that availability of skills is a greater challenge than a year ago. The inability to acquire suitably-skilled staff may act as a cap on growth, holding back economic performance.”
Melissa Jackson, director of corporate recovery and insolvency at Carter Backer Winter
“Insolvency practitioners that are still waiting for an avalanche of zombie companies to tip over into insolvency are searching for scotch mist. There is still an enormous amount of stagnation in the economy despite the new shoots of growth an optimism. A rise in interest rates may tip the balance for some struggling companies that are right on the edge, but it won’t change things for the majority. Businesses have got into the habit of surviving.
“An interest rate rise may make a tight situation even tighter, but the majority of businesses will continue to fight on.”
Graham Bushby, head of restructuring and recovery at Baker Tilly
“In the past, we have seen an increase in corporate insolvencies as we have emerged from recession, but this isn’t the case this time around. In fact, the number of company liquidations, administrations, company voluntary arrangement and receiverships are all down on the same period last year.
“There are many reasons for this, not least of which is the continued record low interest rates which have enabled many companies to struggle on despite serious underlying problems. Many of these companies – and particularly those who have been placed onto interest only deals with lenders – will have to brace themselves for rate rises over the next few years.
“For some, the gradual and limited rate rises promised by the Bank of England will be just about manageable, for others it will be the final straw.”
Brian Johnson, insolvency partner at HW Fisher
“With company liquidations and administrations both down markedly, these figures show Britain’s resurgent levels of business confidence.
“But there is nothing inevitable about the continued decline in levels of business failure.
“Consumer demand is strong and interest rates remain low – boosting the strong companies and flattering the weak ones.
“The weakest links of all are in a fools’ paradise, which is likely to come to a juddering halt when interest rates rise. Despite the mixed messages coming from Threadneedle Street, this prospect is both inevitable and increasingly imminent.
“More worrying is the attitude of the banks. While they are keen to trumpet their modest increases in lending to SMEs, they are also showing less forbearance to those companies that are struggling with debt repayments.
“After so long with shutters pulled down to new business lending, banks are finally beginning to lend again. But this is the hollowest of victories if it is accompanied by a drive to pull the rug from under existing borrowers.
“An end to forbearance will ensure the banks take one step forward and three steps back. That hardening attitude, coupled with the rise in interest rates – which could come by the end of the year – risks undermining all the progress made in the past year.”
Source: The Insolvency Service
Matthew Chadwick, business restructuring partner at BDO
“Today’s rise in individual voluntary arrangements is typical at our position in the economic cycle and need not be cause for alarm. There are many signs of a strengthening recovery including rising wages, record employment figures and increased retail spend: this, paradoxically, is another one of them.
“Now property prices are rising, creditors are more likely to think about recouping long-standing debts. A continuing rise in the number of personal insolvencies in the next 12-18 months is therefore likely.
“Putting cash into savings has not been attractive with interest rates at rock bottom. But individuals, especially homeowners with unsecured debt, should consider shoring up their finances and replenishing their savings now, if only to avoid sleepless nights later. With the economy looking more healthy, those with bad debts are now more likely to be asked to pay them back.”
“Personal insolvencies fell sharply immediately after the recession but the dip has really bottomed out over the last year or so. Over the past year or two, personal insolvency numbers have pretty much held steady, but things are really beginning to creep up, especially with Individual Voluntary Arrangements.”
Mark Sands, personal insolvency partner at Baker Tilly
“The official personal insolvency statistics show that there were over 14,500 IVAs in the second quarter of 2014 – the highest quarterly number since the introduction of IVAs in 1987. What’s clear is that borrowers are increasingly looking to resolve problem debts rather than considering the nuclear option of bankruptcy which is down 15.9 per cent compared to the same period last year.
“This is a sign that people are confident enough in their financial prospects to commit to a five year regular payment plan to settle up their debts in full with the balance then written off, and reflects the ongoing positive effect of record low interest rates.
“It is to be hoped that many of those people entering IVAs now will be able to see them through to their successful conclusion, but the prospect of interest rate rises, even if gradual and limited as promised, will have a significant impact on those whose budgets are already tight.
“For someone who has committed to paying £150 a month for five years to settle unsecured debts under an IVA, a two per cent rise on a 25-year 5% repayment mortgage of £150,000 could raise monthly mortgage payments by around £180, effectively wiping out the money needed to meet the IVA obligations. Some borrowers will either have to rein in their spending or face the prospect of bankruptcy.”
Bev Budsworth, managing director at The Debt Advisor
“Today’s figures show that, aside from all the talk of economic recovery, it’s clear that people are really struggling, with a rate of personal insolvency not seen since summer 2012 – a time when we were just emerging from a double-dip recession.
“Many households are under real financial pressure at the moment, which is echoed in today’s figures. The underlying factors to today’s figures shows that it’s still a real mixed bag out there with continually depressed wages not helped by rising inflation. According to the Money Advice Service, nearly nine million adults have too much debt and only escaped today’s figures by just managing to make their financial commitments.
“I believe that there are millions of adults in the UK who are just scraping by; those people who are flying under the radar and are not yet a statistic because they are just about making their debt repayments each month.
“Although the economy is in recovery for some, for hundreds of thousands of people, their finances are on a knife edge, held in check only by a sustained low interest rate. For me, the acid test will be when the Bank of England starts to raise its base rate and people’s mortgage payments follow suit, plunging over a million households in ‘debt peril’, compared to the current 600,000 – according to the Resolution Foundation.”
Source: The Insolvency Service
For the full Insolvency Service infographic click here
Insolvency practitioners often have to utilities their skills within a variety of market sectors and businesses. Brian Johnson, partner at HW Fisher & Company, writes about one of his more unusual cases
In my many years in the insolvency profession, I have been involved in and am familiar with some very interesting administrations – all of which call on an IP’s ability to use the tools you have acquired as a practitioner and apply them to even the most unusual of business models.
One of the most unusual insolvencies was that of a lap-dancing club in Westminster many moons ago, which is something one rarely encounters.
Despite the nature of the business being something that we in the insolvency world seldom come across, it wasn’t actually just the services provided that made this case stand out. Despite the administration of the club, the only thing of value that the club held for the sale was their license as well as the lease of the premises. Therefore, it was paramount that throughout the insolvency the business was able to retain the license and continue to trade – as without the license, the business would hold no value for re-sale.
With any insolvency, it is our job to work for all stakeholders to ensure the interests of all stakeholders are taken into account and to maximise the outcome for all involved. Although this is not always possible, we aim to work with the owner to get the most value from the sale of all assets to pay off the creditors as well as avoiding as much personal liability as possible. However, when a business has no tangible assets, such as wholly owned premises, stock, vehicles, equipment etc., this becomes extremely hard to draw any value from in order to make a sale. In this instance, the licence was the only item of value for sale, alongside the leasehold interest in the property.
Because the dancers at the club all operated on a self-employed basis, trying to keep them working became complicated as they were considered ordinary unsecured creditors rather than employees. The dancers were all paid a week in hand and in order to retain the license it was paramount that the girls continued to work there during the period of administration.
Employees, as preferential creditors, have certain claims for salary and holiday pay, which allow them rank ahead of all but fixed creditors, as well as allowing them to make certain claims on the Redundancy Payments Fund. But, in order to keep the dancers working, they had to continue to be paid despite their claim on assets not ranking as high as that of employees.
The insolvency team responsible were fully aware of this and understood that the club held no value if the license was revoked and it would be hard to get any money from a sale of the premises. Because of this, the club had to be incredibly careful not to breach the agreements of the licence – especially as the council ran regular checks to ensure everything was in order.
Unfortunately, despite a few weeks of trading throughout the period of administration, the council eventually revoked the licence and forced the club to close indefinitely. This was a real shame because despite the council’s clear dislike for the club, they were trading in an honourable manner just like any other business. Equally, by taking away the license it made the business very hard to get any money out of the club’s sale as without the licence, the club was in essence, devoid of any assets.
To add insult to injury, the lead administrator upped and left for a cruise in the final weeks of the insolvency, which left a few unhappy dancers to say the least! In fact, the office of the administrator was visited by some unwanted visitors in demand of additional payment for the dancers final week of work! It would have been a very interesting day to be in the reception of that office, I’m sure…
Finally, any suggestion that the administrators and their staff were excessively hands on in respect of this job is scurrilous.
What the graphic shows: The number of administration appointments won by the top 10 performing firms during the month ending 30 June 2014 across England & Wales as listed in The London Gazette.
Despite fierce competition, FRP Advisory saw off several firms to top the chart in June with nine administration appointments, narrowly beating Begbies Traynor, KPMG and Mazars, which collected eight, seven and seven appointments respectively. All but two of FRP Advisory’s cases were from the south east region, primarily within the services sector.
Begbies Traynor collected eight appointments, mainly from the north of England, including debt management company Debt Help & Advice Ltd and its subsidiaries. The firm continues to be the highest-appointed of any in the country, having collected 76 cases so far in 2014, over half of its total appointments in 2013 (116).
Six of the seven administrative appointments for KPMG during June came from the insolvent property group Riverbank, while Mazars were appointed to a range of cases throughout England across various sectors.
Mid-tier firms Duff & Phelps, Grant Thornton, Baker Tilly, BDO and Leonard Curtis all collected between six and four appointments throughout the month.
What the graphic shows: The percentage increase and decrease in case numbers by firm month-on-month between May and June 2014.
What the graphic shows: The percentage increase and decrease in case numbers by firm year-on-year between June 2013 and June 2014.
What the graphic shows: Administrative appointments per market sector in England and Wales during the month ending 30 June 2014 as listed in The London Gazette.
After a subdued month in May, administration appointments rose by 34% month-on-month, from 93 in May to 125 cases in June. There were month-on-month increases across the majority of sectors, most noticeably within the services sector, which saw a 64% increase in administrations between May and June.
There were other increases within the property, retail, health & social care, and financial sectors, although many sectors saw administration levels stay broadly flat month-on-month.
What the graphic shows: The busiest regions for administration appointments in England and Wales during the month ending 30 June 2014 as listed in The London Gazette.
What the graphic shows: The split of administration appointments and receiverships between the clearing banks for the month ending 30 June 2014, based on floating charges register at Companies House.
What the graphic shows: The number of appointments taken by insolvency practices by different banks for the month ending 30 June 2014, based on where those clearing banks held floating charges registered at Companies House.