Company Accounts (Payments to Creditors) (Hansard, 27 April 1994)

I beg to move,

That leave be given to bring in a Bill to ensure the publication of information relating to the payment of company creditors and to encourage prompt settlement; and for connected purposes. This is not a new subject—indeed, over the years it has received a great deal of parliamentary and outside attention. One of the purposes of my Bill is to try to ensure more prompt payment within commerce, particularly to small companies, where prompt payment may actually determine their long-term viability.

The background to the Bill is that, in 1992, the Government said in the Budget that they would be prepared to issue two consultation papers—which were subsequently released in January and May 1993—about how to improve prompt payment of creditors in commerce. That decision followed a 1978 Law Commission report about the rate of statutory interest for commercial debts, a 1986 report about payment by the Confederation of British Industry entitled "A Guide to Good Practice", as well as a great deal of parliamentary activity in the last few years.

That culminated in the Interest on Debts Bill for commercial contracts, which was introduced in 1990 by the hon. Member for Hampshire, East (Mr. Mates). It also resulted in an early-day motion, which had the support of hon. Members on both sides of the House—as does my Bill —and was signed by no fewer than 129 Members. That early-day motion was tabled by my hon. Friend the Member for Tatton (Mr. Hamilton), who is now Under-Secretary of State for Corporate Affairs at the Department of Trade and Industry.

I appreciate that the Government are consulting on how to improve prompt payment in commerce, because it is a significant problem, particularly for smaller companies. The CBI has estimated that, at any one time, those companies alone are owed £100 million in overiue rather than late debts. The Times recently estimated that the cost to industry of late payment is about £1.5 billion a year, which is equal to the entire amount injected into the venture capital industry in any one year.

The problem of late payment primarily affects small companies, for three reasons. First, they do not have the commercial clout to ensure that creditors pay up. That is emphasised to me time and again by small companies in my area. Secondly, the administration for recovering debt is relatively and proportionately much more expensive for small companies. Thirdly, late payment is a particular problem for small companies because they generate a significant number of the new jobs upon which we rely. The labour force survey has estimated that, up until the end of the 1980s, small companies generated 1.85 million jobs—13 times more than those generated by their larger brethren.

If we are to maintain successful small companies and the investment they make, it is crucial that they are paid on time. It has been estimated that 50 per cent. of British companies rely upon short-term debt, so prompt payment is all the more important for them than it is for German companies, where only 14 per cent. rely on such debt.

Prompt payment is a current problem rather than one of the past, because, as we come out of recession, more and more companies want to upgrade their activities, invest in 247 stock and additional debtors. As a result of such activities those companies will be subject to a certain amount of financial pressure. Trade Indemnity has blamed late payment for the fact that, despite the economic upturn, there was an 11 per cent. rise in first quarter business failures compared with the previous three months. That is why Trade Indemnity's chief economist, William Simpson, has said:

For two quarters the running, average value of unpaid debt has risen. The scale of unpaid debt threatens many otherwise successful firms, despite economic recovery. Many possible solutions to the problem have been suggested. One of the most important is the attempt to try to change the culture within which people trade. Richard Brucciani, chairman of the CBI's smaller firms council, has said: The problem of late payment requires a change of culture and attitude in business, and a published statement of corporate payment policy"— that is one of the two suggestions in my Bill—

would give suppliers a useful insight into this. Because of the shortage of time, I will not describe the possible solutions proposed by the Federation of Small Businesses, the CBI and the Government to promote prompt payment. One of the most prominent of those suggestions, however, is the imposition of a statutory rate of interest on overdue debts, but opinion on the desirability of such a solution is not unanimous. It appears that the Confederation of British Industry and the Institute of Directors are prepared to support it, although the Institute of Chartered Accountants in England & Wales, the Federation of Small Businesses and the Chartered Association of Certified Accountants all have reservations.

A statutory rate of interest would have many disadvantages. It would require companies to undertake additional administration. It might institutionalise late payment, rewarding it by a statutory rate of interest, in the sense that it is likely to be informally ignored by small companies which want further business from their larger customers. It has not been noticeably successful in encouraging prompt payment in France or Germany, where it currently operates. Hence I make two proposals today, which are simple and which do something to change the business culture in the way that I have described.

My first proposal is that every public company—public companies are generally synonymous with larger companies—should be required to make a statement of its 248 payment patterns and its payment policy in its audited accounts. If it is a conglomerate, it would have to do it on a subsidiary or a sectoral basis.

The CBI has suggested a specific form of statement: It is this company's policy to negotiate payment terms with suppliers at the outset of the deal and to pay within the time scale agreed. In a sense, that says everything and nothing. It is peace and motherhood; it is a statement of good intentions. Although I am sure that we shall all be happy with it, people wish to know not only whether companies sign up to prompt payment, especially the larger companies, but whether they carry it out in practice. That is why my second proposal is crucial if we are to change the culture in the way that we have described.

My second proposal is that every public company should be required to publish an analysis of the aging of its creditors in its public accounts, so that creditors or shareholders or institutions or the general public can see to what extent its practice matches its rhetoric. There are many ways of doing that. The Institute of Chartered Accountants, in its reply to the Government consultation document, mentioned three. They all have different drawbacks and different benefits.

I am absolutely sure that it is not beyond the wit of the accountancy profession to come up with an easily understandable, reasonably consistent, way of describing the aging of creditors and the way in which firms fulfil the pledges they give about prompt payments in their company accounts that would allow potential customers to decide whether it was worth while dealing with those companies in advance rather than after the event, as would be the case with the statutory rate of interest.

My view is that, in the sense that it would give forewarning to small companies of late payment of debt, that would be a valuable measure. I commend it to the House.

Question put and agreed to.

Bill ordered to be brought in by Mr. Anthony Coombs, Mr. Michael Colvin, Mr. Nigel Griffiths, Sir Anthony Durant, Mr. Bob Dunn, Mr. Malcolm Bruce, Mr. Keith Mans, Mr. David Evans, Mr. Sebastian Coe, Mr. John Sykes, Mr. David Martin, Mr. Simon Burns.