HC Deb 13 February 1997 vol 290 cc476-88

4.4 pm

The Minister for Small Business, Industry and Energy (Mr. Richard Page)

I beg to move, That the draft Companies Act 1985 (Directors' Report) (Statement of Payment Practice) Regulations 1997, which were laid before this House on 27th January, be approved. As the Minister with responsibility for small business, I am introducing the regulations, and not my hon. Friend the Minister for Competition and Consumer Affairs.

The regulations will help small businesses to gauge the fairness of the cash payment records of larger companies. Hon. Members will know that the problems caused by late payment continue to cause concern to small businesses. That was one of the major concerns highlighted last year, when we gave small firms the opportunity to shape future policies through the regional "Your Business Matters" conferences.

While there are no easy ways of tackling the problems caused by late payment, the Government are committed to helping small businesses. We have introduced a number of positive measures to tackle the problems associated with late payment. The regulations are another step along the way to helping small businesses to help themselves and to change the culture of payment practice.

In 1993, we consulted on a variety of possible ways in which payment performance could be disclosed in accounts. During the consultation, it became clear that the option of reporting payment policy and performance in the directors' report was supported quite strongly. In the light of that, we consulted again in February 1995 on that measure. As a result, in January last year, the Second Standing Committee on Delegated Legislation approved regulations requiring public limited companies and their private subsidiaries to disclose their payment policies in their directors' reports. That dealt with publication of payment policies.

However, concern continued to be expressed by small companies about the effects of late payment of commercial debt, most recently by delegates to the "Your Business Matters" conferences—the largest ever exercise in consulting small business, which the Prime Minister launched in 1995. He gave a commitment to act on every recommendation that "Your Business Matters" made. We returned to the issue of whether, and how, payment practice might be reported.

Before deciding on a method of payment performance, officials in my Department met a large number of interested parties, including a selection of large companies and small firms representative bodies, to test out possible methods of calculating payment performance. Our aim was to find a method that would not be too burdensome and that would be relatively straightforward for companies to produce and report in their annual accounts. Of all the companies that responded to the consultation, none identified any alternative preferable to the method proposed, and all were agreed that that option has the merit of being the least burdensome, as it is partly based on data that are already collected for accounts.

I come now to the details of the new disclosure requirement set out in the draft regulations. As I have already noted, we tried to find a straightforward way of stating payment performance, which provides useful information in a readily understandable way. We could not require companies to put into their accounts details of the time taken to pay every invoice. That would not only compromise commercial confidentiality but impose an impossible burden on companies. Therefore, any figure will have to be based on some form of averaging.

The regulations will require companies to state the figure, expressed in days, which bears the same proportion to the number of days in the year as the amount owed to year-end trade creditors bears to amounts invoiced by suppliers during the year. It might be helpful to the House if I illustrated that by a practical example. Suppose that a company has purchased £100,000-worth of supplies during the year and has at the end of the year some £10,000 of trade credit outstanding. Trade creditors therefore represent 10 per cent. of the amounts invoiced. Ten per cent. of the number of days in the year is 36.5 days. So the company would have to disclose that figure in the directors' report. That would be simple for the companies to do and would provide a ready and easy reckoner, so that the small company could realise just how a company paid its bills. The figure would help meet the needs of small suppliers, by providing additional and easily understandable information on the payment practices of larger companies.

There are a number of advantages to using that measure. As I have shown, it would be easy to calculate. It would be readily understood and interpreted. It would use the amount for trade creditors that appears separately in the annual accounts—except for banks and insurance companies—and require little additional work to identify the purchase amounts to be used in the calculation. The average will be comparable year on year in respect of individual companies and comparable across companies with trading activities of the same style and nature.

The new disclosure requirement is a logical next step to complement the payment policy disclosures that we introduced last year. It is therefore sensible that it should apply to the same companies—public limited companies and their large private subsidiaries. The new requirement will go into the directors' report alongside the policy disclosure. That should help people in smaller supplier companies, who will not have to go through pages of notes to the accounts to search for one figure.

That would also enable users of the information to keep track, in a relatively straightforward way, of how a company's performance measured up to its stated policy year on year. No doubt, it would give directors the opportunity to explain any divergence in the figures at annual general meetings, if the occasion demanded it.

Indeed, most small firms organisations have welcomed the regulations and the added value that they will provide to small businesses that trade with those larger public companies and their private subsidiaries. I echo those thoughts.

As to timing, the new regulations will come into force in relation to the report and accounts for financial years ending after 24 March 1997.

As the Minister who has responsibility for deregulation in my Department, I am aware as anyone, perhaps more than most, of the need to cut red tape wherever possible. However, that does not mean that there should be no regulation. I believe that this modest intervention is necessary, to help to discourage any large company from succumbing to the temptation to abuse its position. It is clearly a matter of balance.

It is necessary to ensure that the costs to business of the additional administrative burden of monitoring payment performance do not outweigh the prospective benefits of tightening up payment times. It is of no benefit to suppliers if the requirement to collate and publish figures forces large companies to incur significant additional administrative or other compliance costs. The statement, therefore, relies on the public presentation of information that is already collected for the accounts or otherwise readily available. That is why we have opted for the mechanism set out in the regulations. It is a balance between ensuring that valid information is provided and minimising the cost of producing that information.

Tackling late payment is, of course, not just about company reporting. We must see the measures in the context of our wider policies. The House will be aware that I announced in June last year that following a thorough review, the Government would not be legislating for a statutory right to interest. That review was informed by updated submissions from representative bodies that had responded to the public consultation on the matter in 1993; the "Your Business Matters" conferences; and detailed research by the university of Bradford and others.

It was clear from the review that there had been a significant shift in opinion against legislation, particularly by all but one of the small firms representative organisations. Concerns were expressed that legislation would have a negative impact on small businesses; that it would add little to existing rights; and that it might not actually be effective. In fact, it became clear that it was the view of small business that a statutory right to interest would be more likely to harm small businesses than help them.

The evidence from Europe, where most countries have a statutory right to interest, suggests a scant connection between such legislation and evidence of early payment. A statutory right to interest would still involve a small business man or woman appealing to courts, an option that is, in any case, open to them at the moment. It is for such reasons that eight of the nine small firms representative organisations that responded to the consultation rejected the imposition of a statutory right to interest.

Therefore, the view of small business is clear. Steps to eradicate late payment must be taken, but a statutory right to interest is not the solution. Good practice, like most things, begins at home. It is right that the Government should lead by example and ensure that their own house is in order. Departments and agencies are already required to pay their bills within contract terms or 30 days where alternative terms have not been agreed. All Departments have signed up to the Confederation of British Industry's prompt payments code and are required to monitor and publish their actual performance. In addition, the Prime Minister announced in March last year that the Government would publish each year a league table of Departments' payment performance, based on a rigorous system of measurement.

The House will be aware that, on 17 December, my hon. Friend the Economic Secretary to the Treasury published and made available to it the results of that first league table. It is worth noting that the vast majority of Departments perform well. Those that have underperformed have been left in no doubt about the need to improve. I can assure the House that that is absolutely correct. I have received assurances that those improvements will happen.

Concerns were also expressed at the regional "Your Business Matters" conferences that local authorities were late payers. On 29 November, the Audit Commission published payment performance figures for local authorities, which showed that the average figure for settling invoices on time was 77 per cent. That was based on voluntary returns from 57 per cent. of local authorities. I do not know what hon. Members may think, but I do not believe that either of those figures is satisfactory.

Hon. Members will wish to be aware that the Audit Commission has now announced that it will be issuing a direction to all local authorities requiring payment performance to be a performance indicator for 1997–98. That information will help to inform businesses bidding for local authority contracts just how quickly they will be paid. We can, therefore, see that the regulations build on what the public sector is already doing—providing information to suppliers on when they will be paid.

In the 1994 White Paper on competitiveness, we also announced that we would work with the business community to develop a British Standard for prompt payment. That standard was duly developed by the CBI, to which I wish to pay tribute, with the support of the Department of Trade and Industry. BS7890, "British Standard for Prompt Payment", was launched by myself and the Economic Secretary in September 1996. The standard sets out basic principles of credit management and best practice. It should help to bring about improvements in payment practice and, ultimately, the cash flow of businesses.

We also said that we would look at the court systems as a means of recovering debts. The Lord Chancellor has introduced a number of changes to simplify and streamline court procedures, including raising the small claims limit to £3,000 and making it easier for small businesses to transfer cases to the High Court for enforcement by sheriff's officers.

I have made a personal commitment to take up any case where a small business is facing late payment from a large business. However, the majority of cases that come before me are more likely to involve the provision of poor-quality goods or services rather than late payment. Nevertheless, my open promise stands and any small firm that is not being paid on time by one of the top 100 companies or by any Government Department can approach me.

The Government cannot provide all the answers and there is much that small businesses can do to help themselves. Research by Bradford university has shown that small businesses that invest in front-ended credit management activities have significantly more invoices paid on time and suffer less from bad debts. In the light of that illuminating research, I have asked the chairmen of the business links in England and the equivalent bodies in Scotland, Wales and Northern Ireland to help small businesses to improve their credit management skills. Building on that help, my Department also publishes a free information pack on effective credit management procedures, called "Make the Cash Flow". It is produced in partnership with the Institute of Credit Management and all the main small firms organisations.

The regulations are a substantial step in reinforcing the culture of prompt payment, in addition to measures that the Government have already introduced. They deserve the support of the whole House.

4.20 pm
Mrs. Barbara Roche (Hornsey and Wood Green)

I welcome this statutory instrument, for which the Labour party has been calling for a number of years. I congratulate the Minister on having finally caught up with us.

The statutory instrument will add to the basket of measures that we plan to introduce and will at least ensure that small firms can find out about the payment practices of the large companies with which they trade. It is four years since Labour first called for the measure and two consultations have been held by Ministers. Given that the first, in 1993, found that 66 per cent. were in favour of acting, can the Minister explain why it has taken him four years to act in this vital area?

It is not too dramatic to say that late payment is the scourge of small firms. It can stop them growing and expanding or—more drastic—it can send basically good businesses to the wall. The Forum of Private Business recently surveyed its members about the issue. I pay tribute to the forum for its sterling work on behalf of its members, in respect of the appalling impact of late payment on small firms. The forum found that one in five of those surveyed had been prevented from growing by late payment. In its response to the Government's response, it explained: Late payment undermines certainty in commercial transactions, distorting business decisions … Small Businesses … are forced by late payment into increased reliance on loan capital. Given the cost of such funding late payment acts as a direct restraint on growth. This not only has a direct effect on prosperity and tax revenue, but also acts as a significant restraint on employment creation. The Federation of Small Businesses estimated that, of 40,000 firms that had gone to the wall, 5,000 had done so because of late payment. The problem is not theoretical, but is a live issue that confronts many small businesses up and down the United Kingdom every day. I recently received a letter from a small industrial supplies firm in Glasgow, saying: We have huge problems and have to struggle day in and day out because of large companies deliberately withholding payments for months at a time. Millions of small firms are in a similar position. That happens time and again and the bad news is that the problem of late payment in the UK is worsening. The 1996 Grant Thornton European survey found that the average payment period in the UK has increased from 48 days in 1995 to 50 days in 1996.

The Minister referred to the Government's record; let us consider it in a little detail, because it is called into question. I note the Minister's offer; only yesterday, my office had a call from a small, high-tech firm that has among its customers several Government Departments and large businesses. A year ago, after waiting more than two months for a bill of more than £1,000 to be paid by the Treasury, the firm was forced to suspend the service that it was supplying. What a wonderful example our Government set to businesses—they cannot even pay their own bills on time.

It was bad enough for the company to be owed money by the Treasury, but it is also waiting for the Department of Trade and Industry—graced by the Minister—to pay a bill of several hundred pounds. It has so far waited more than 90 days. No doubt Ministers will say that such instances are anecdotal and do not represent the great efforts that the Government are making.

It is interesting that the Government sometimes blame the very businesses that they are talking about. Only last June, the Minister told The Independent: Small companies are so delighted about winning an order they forget about getting paid. More recently, the Minister told The Mail on Sunday that small firms are "unprofessional in credit control". Understandably, Stan Mendham, chief executive of the Forum of Private Business, responded—[Interruption.] The Minister may laugh, but this is what businesses are saying.

Stan Mendham, chief executive of the forum, responded to the Minister by saying: His facts are fundamentally wrong. I am angry and frustrated at these comments on an issue that causes horrendous problems for businesses. As the Minister finds the subject so funny, perhaps he will comment on the Government's record in the light of remarks made by the Institute of Directors, which recently said in its "Enterprise" newsletter that it is well known that the government itself is one of the worst offenders when it comes to late payment. The fact was resoundingly confirmed in a recent consultation exercise mounted by the IOD on the subject of late payment, with a significant proportion of members telling us that the government routinely pays its bills months late as a matter of course". What a record for the Minister to have to defend in the House.

I hope that the explanation that the Minister gives later will be better than that of the Economic Secretary, to whom he referred. She explained in a letter to me that her Department had paid one quarter of its bills late because a member of staff fell ill late in 1994/95 and…the promptness of payment suffered". She then told the director general of the CBI that that record was not the crime it had been portrayed". When I meet representatives of small firms, they are incredulous that the Treasury, which at that time employed more than 1,000 people, had such a terrible record on late payment because one person fell ill. Presumably, when that member of the Treasury staff went off ill, he took the Treasury's cheque book with him. The fact that the Economic Secretary is the Minister in charge of reforming promptness of payment throughout Whitehall and in every Government Department makes the record worse.

Perhaps we can take a look at what the Economic Secretary has achieved. In December, the Government released figures for June to August 1996—they were to show the much-vaunted improvement after the Prime Minister had been embarrassed into telling Departments to pull up their socks, get on with it and see what they could do. Sadly, they were to bring him, and small firms, very little comfort. Nine Government Departments, including the Department of Health, the Department of Transport and the Serious Fraud Office, had a worse record in that period than in the previous year, 1995–96. The Ministry of Agriculture, Fisheries and Food paid one in five of its bills late.

Even the Deputy Prime Minister, who knows a thing or two about red bills, given his boasts about stringing along his creditors when he was in business, admits that the Government's record is dire. This year's White Paper on competitiveness, referring to the Government's record in that regard, said that there was a strong perception that Government Departments were often amongst the worst perpetrators of late payment. In March 1996, the Prime Minister said: I believe we should take steps to generate embarrassment amongst those who wilfully and continually pay late"— so I hope that from now on the Prime Minister will generate that embarrassment among Government Departments. If the Prime Minister will not do that, the Opposition are determined to do so.

As my right hon. Friend the Leader of the Opposition has said many times, unlike the present Government, the next Labour Government will take tough action on late payment. We want to change the culture that allows large companies and Government Departments to treat small firms as a source of free credit, and we believe that it is necessary to have a basket of measures. [Interruption.] The Minister keeps laughing. I fail to understand what there is to laugh about in this serious subject, which drives many small and medium-sized enterprises to the wall.

Although we applaud the efforts of business organisations, banks and others to improve the credit control procedures of small firms, we do not believe such improvement to be the whole answer. A Labour Government will insist that Government Departments and local authorities pay on time and, after consulting about the best way to do so, we shall introduce a statutory right of interest on the late payment of debt above a given threshold. That would remove the financial advantage that large firms have in paying late. Only the United Kingdom and Ireland do not have a general right to interest embodied in legislation in the event of late payment of commercial debt.

I note what the Minister said when he cavalierly dismissed the arguments for a statutory right to interest. The results of all the surveys that have been conducted on that issue make interesting reading. In a Lloyds bank survey in March 1996, a full 75 per cent. of the businesses that responded welcomed a statutory right to interest. A recent "Business Pages" survey, in 1996, found that 69 per cent. of the businesses that responded supported a statutory right to interest.

Closer to home, a quarter of Conservative Members of Parliament showed support for the Labour party policy of a statutory right to interest by signing an early-day motion. Very many of the Minister's colleagues who are Conservative Members of the European Parliament also support a statutory right to interest, and they signalled that support recently.

What of the statutory instrument before us? We are pleased that, at long last, Ministers have seen the light. The principle behind it is, from one perspective, a freedom of information measure. However, the Minister has not yet answered all the questions surrounding the new procedure. The Forum of Private Business and the Federation of Small Businesses are worried about how it will be enforced. Perhaps the Minister will comment.

The British Bankers Association has expressed significant anxieties about the formula used. It points out that the calculated period would be extremely distorted as a result of purchases falling unevenly towards the end of the year. A company that bought 100 widgets for 11 months and 200 in the 12th, and paid in 30 days, would be shown as taking 56 days to pay under the proposed method. As the British Bankers Association points out, that is not an uncommon scenario, as most organisations have an increase in purchasing activity towards the end of the financial year, as budget holders seek to spend the moneys allocated to them for that year. Almost more worrying, a company that paid very late throughout the year and then made few or no purchases in the last month would have a squeaky-clean record and appear a very prompt payer.

Will the Minister explain how he will avoid that situation, so that small firms get the most accurate information possible, and why he did not require large firms to state what percentage of their bills are paid within the given payment policy period, as Departments are required to do? That would mean that firms could easily be compared, just as, for example, we can look at the latest Government figures and see that the Department of Trade and Industry has a worse record on paying its bills on time than the Office of the National Lottery. The Minister may want to dwell on that point later. We could also compare the public and private sectors, which might prove to be an illuminating exercise.

When Ministers finally got round to taking up our suggestion that large firms should state their payment practices in their annual reports, the Under-Secretary of State said in a press release that the aim of the statutory instrument was to give small firms more details of the payment records of the larger companies with whom they may be considering doing business. Yet even with that new measure, small firms will have to collect all the annual reports of the large companies with which they are considering doing business in order to make meaningful comparisons.

That is why I am pleased to announce that, in government, Labour will encourage small business organisations and others to consider collating that information and publishing it in league tables of prompt payers, so that small firms can decide for themselves which large firms to do business with. I have already spoken to both the Forum of Private Business and the Federation of Small Businesses about that suggestion and they are keen to be involved.

This is yet another example of Labour's determination to tackle the problem and reform Britain's red bill record. I commend our proposal to the House and to the small firms that are following the national debate on this vital issue, which makes so many of their lives a misery. Small and medium-sized businesses are the backbone of our economy and they deserve better support. They will get better support than this failing Government have been able to give them.

4.36 pm
Sir John Cope (Northavon)

I welcome this statutory instrument. As my hon. Friend the Minister admitted in his opening speech, it is new regulation on businesses, but I am encouraged to see that on today's Order Paper we have no fewer than four deregulation orders to decide later under the excellent new procedure of the Deregulation Committee. So that makes four motions to two, if one counts motion 3 on merchant shipping and ro-ro passenger ship survivability. Nevertheless, that sounds to me to be another desirable regulation and I think that four to two is not too bad in the circumstances.

I welcome the statutory instrument because the Small Business Bureau, of which I have the honour to be the deputy chairman, has been pressing for it for a long time. The excellent director of research of that organisation, Mr. Barry Baldwin, has pressed particularly hard in that respect. Under its modern policy of agreeing to everything that anyone else says, the Labour party has also been pressing for such regulations recently, so I am glad that they are welcomed all round.

Mrs. Roche

Does the right hon. Gentleman accept that it has been our policy for about four years and that it is the Government who have just woken up to it?

Sir John Cope

I cannot vouch for the time that the hon. Lady mentions. I have been conscious for only about a year of the Labour party pressing for it, but it may have made the suggestion earlier. However long ago it claims to have made the suggestion, the matter has been on the Small Business Bureau's agenda for a long time. That is where the proposal originated.

This is only one part of the DTI's strategy to combat the late payment of debt, as my hon. Friend the Minister explained in his opening remarks. It is a difficult problem and it will remain a difficult problem.

The hon. Member for Hornsey and Wood Green (Mrs. Roche) quoted the Grant Thornton survey, saying that, between 1995 and 1996, the situation had become slightly worse—the average payment period increasing from 48 days to 50 days. She could have pointed out that, in 1993, it was 52 days, so depending on the period it is also an improvement. I do not think that there is a significant statistical difference in any of those figures.

This method, and the other methods that my hon. Friend the Minister outlined, is a better way to tackle the problem of late debt than the proposal, which has been around for many years, for statutory interest on late payment. I am, of course, well aware that the Forum of Private Business, particularly its very energetic chief executive, Stan Mendham, has campaigned tirelessly about this for many years, since the forum's inception. I have argued with him on many occasions, in various capacities, and I have never been in favour of statutory interest on late payment. The reasons deserve to be set out, as the proposal has been made.

My hon. Friend set out a couple of the reasons. When I was an articled clerk in an accountant's office, it was quite normal in those days—now a long time ago, I am sorry to say—for firms, particularly in some trades, to charge interest on late payment, or, as it was more often expressed, discount for prompt cash payment. That practice has greatly decreased in this country and is now relatively rare, but that is not so, I am told, in Germany, where it is quite common to offer a discount for prompt cash payment. I suspect that it exists informally to a certain extent in large retail stores and so on because of the growth in the use of credit cards, but as a formal mechanism the practice has declined.

The provision already exists in the law of this country to permit an interest charge on late payment, or discount on cash, if the firms concerned in the transaction wish to do it that way. The fact that few companies make use of that provision would seem to show that there is not a great call for it. Ultimately, a business has to calculate how hard to pursue the debt, and whether by pursuing it in one way or another it will be more likely to get the money.

A firm has to determine why the debt is being paid late. If the problem arises because the debtor is short of money, the fact that interest will be payable on the debt is of no help at all. If he cannot pay the capital, he will not be able to pay the interest either. Depending on the level of interest, it could still be cheaper for the debtor to take trade credit rather than a bank overdraft.

Mr. Nigel Evans (Ribble Valley)

Does my right hon. Friend accept that these regulations will assist small to medium-sized enterprises in their knowledge about late payment? However, that is just one of many things to which they will look to assist them, for example, competitive interest rates, low inflation, and the continuation of the deregulation initiative started by the Government. There will, however, be a number of measures that they will be pitted against, such as the introduction of a minimum wage and the imposition of the 48-hour directive, both of which are measures that the Labour party, which pretends to support small to medium-sized enterprises, encourages.

Sir John Cope

That is quite correct. Many small businesses, particularly retail businesses, of which my hon. Friend has a great deal of experience, will not benefit from statutory interest on late payment, because by definition retail cash businesses have no debtors. They take cash over the counter. They are doing their best to manage their cash flow to try to sell the goods that they buy—before they have to pay for them, if possible. That is the ideal in retail business, and very small businesses are often retail businesses. As far as they are concerned, the proposal for statutory interest on debt is not desirable at all. It will harm them.

The other point is that the legislation would need to be incredibly complicated. Just think of the complexities of deciding the first day of the statutory period. In some cases it is easy: it is from the delivery of the goods. But in many cases it is much more complicated. As my hon. Friend the Minister pointed out, when goods are delivered or services given, disputes sometimes arise and people do not wish to pay until that dispute is sorted out—quite rightly.

When one has decided the first day of the statutory period, one then has to decide the length of an appropriate statutory period. For many businesses this differs according to the trade. The habit is different in some trades because the trades themselves differ. In many trades there is a retention. In the building trade, a proportion of the money is not paid until six months—sometimes longer—after the work has been completed, and that is quite normal. What is to happen about that?

Provision would need to be made for all of that in the legislation, which would lead to such legislation being exceptionally complicated.

Sir David Mitchell (North-West Hampshire)

Does my right hon. Friend accept that, in terms of late payment, one small business is as guilty as another, and very often small business customers are late in paying, not just large ones? If one were to make early payment a legal requirement, many small businesses would be in severe financial difficulty as a result of having to pay more frequently.

What is to be done with this new information is quite important. I ask my right hon. Friend to consider the situation of the Government as contractors; the Government place an enormous number of contracts, and there are an enormous number of sub-contractors. Will the Government take account of late payment in deciding whether to place contracts? Will that be a requirement? That would be really effective.

Madam Deputy Speaker (Dame Janet Fookes)

Order. That is the second rather lengthy intervention that we have had. I caution hon. Members against long interventions, which by their nature should be short. There is no great pressure to speak at the moment as far as I can see.

Sir John Cope

It was, nevertheless, a very good intervention, and well worth while if I may say so.

Madam Deputy Speaker

I judge only the length, not the quality.

Sir John Cope

I agree entirely with that, Madam Deputy Speaker.

I agree with my hon. Friend the Member for North-West Hampshire (Sir D. Mitchell). The point about statutory interest on late debt is that if a business is reluctant to enforce through the courts the collection of the principal sum that it is owed, will it not also be just as reluctant to try to enforce any interest that is payable as well? In difficult cases where a business is having difficulty extracting money, the proposal would be of little value to business.

It is for all those reasons that I think that the approach adopted by my hon. Friend the Minister, in this statutory instrument, and in the other measures that he outlined, is the correct approach to the very serious problem of late debt.

4.48 pm
Mr. Nick Harvey (North Devon)

I welcome the proposed regulations. I think that hon. Members on both sides of the House will agree that late payment can have a crippling effect on small and medium-sized enterprises. Although I entirely take the point that some small companies are guilty of late payment, it remains that more often small businesses are the victims of late payment, being dependent on tight budgeting to realise investment projects and to consolidate markets.

To be blunt, late payment provokes simple questions of integrity and business ethics. The withholding of moneys, for whatever reason, should be dealt with firmly and, in my opinion, by legislation. Today's proposals are at least a step in the right direction. The problem is widespread, as it has become normal practice for many large companies to delay payments. The inclusion of payment practice in the directors' report for each financial year will make employees and shareholders aware of their company's payment practice. If their company follows a specified and approved code of conduct, the public or shareholders may rest assured that it is following good business practice.

The key objective is—and must be—to change the culture of bad business practice, which has legitimised payment as an accounting device in order to create the appearance of healthy balance sheets and to provide short-term finance dishonestly. We welcome proposals to encourage better payment practices and to improve all credit management. However, we believe that the outlined proposals do not go far enough. We can deal fully and effectively with the withholding of moneys only by introducing effective legislation. In the past few years, an alarming number of small businesses across the United Kingdom have failed—more than 20,000 failed in 1996.

Such businesses provide jobs, capital, investment and enterprise, and the economy could not survive without them. Yet a massive number of small businesses are failing or finding themselves stuck in a quagmire of economic difficulty and financial hardship. At a time when more than ever we need strong economic growth, we should take measures to eradicate irresponsible business practices such as late payment of debt. We should create the best circumstances for small businesses to grow and prosper.

Although the new regulations cover stating payment practice, it would not be mandatory for companies to inform their suppliers or creditors of their practice. Directors' reports do not have a particularly wide circulation, tending to go only to major shareholders. They would rarely be distributed to other suppliers. Therefore, we believe that the answer is to introduce a statutory right to interest. There are difficulties involved with such a move: as the right hon. Member for Northavon (Sir J. Cope) said, legislation would be complicated, and some of the similar regimes abroad are not particularly effective. However, Sweden and Germany offer statutory redress against overdue payments—including interest on late payment of debts—that is among the best offered by our continental partners, and they demonstrate consistently lower average payment periods.

A statutory right to interest would establish an important catalyst for motivating companies to pay on time. Although I accept that the Government genuinely wish to see the business culture improve, we must provide a stick as well as a carrot. Any such legislation would require widespread consultation with small companies and other interested organisations. I recognise that there has been a consultative process, and that some voices have been raised against the statutory right to interest proposal. However, that does not alter the fact that many businesses and their representatives continue to argue strongly for the measure. We must include provisions to ensure that debts are retrieved efficiently and cost-effectively and that creditors' contracts are not adversely affected.

I do not believe that the proposals will sufficiently reduce the burden of late payment of debt on small businesses, but I welcome them as a starting point from which further action can be taken.

Question put and agreed to.

Resolved, That the draft Companies Act 1985 (Directors' Report) (Statement of Payment Practice) Regulations 1997, which were laid before this House on 27th January, be approved.