Insolvency is making an unwelcome return to the headlines. The number of individuals who were declared insolvent last year reached its highest level since the aftermath of the financial crisis.
According to the Insolvency Service, 99,196 people in England & Wales were declared insolvent in 2017 – up by 9.4 per cent on the year before. Meanwhile company insolvencies also rose by 4.2 per cent, taking the total to 17,243 firms which failed last year.
To put this in context, personal insolvencies have reached a near six-year high as corporate failures have hit their highest level since the first quarter of 2014.
Before the situation deteriorates further, it is time for the government to take a more direct approach in tackling this spike in financial failures.
What are the factors behind the increasing level of insolvency?
Slower economic growth may be one contributory factor.
The UK economy is still growing, albeit somewhat sluggishly compared to other G7 and EU economies. GDP growth in the UK slowed to 0.4 per cent in Q4 2017, reducing 2017 growth overall to 1.7 per cent, its lowest since 2012.
But of arguably greater importance is the failure of the government to act in stemming the increased flow of insolvencies. Government initiatives announced so far have simply not been effective enough in practice.
This is most obviously demonstrated by the Prompt Payment Code (PPC). In essence, signatories to the PPC promise to pay suppliers within 60 days of an invoice being submitted.
Originally conceived in 2015, the government’s biggest suppliers signed up to a strengthened PPC in July 2017 with the aim of helping small businesses to be paid on time: 32 of the government’s biggest suppliers voluntarily committed to pay 95% of outstanding invoices within 60 days of being submitted – and to work towards adopting 30 days as the norm.
Nevertheless, it is estimated that the UK’s small and medium-sized enterprises (SMEs) are collectively owed more than £26 billion in overdue payments.
This is because there are still many companies which typically pay suppliers and sub-contractors in 90 days, rather than 60. A notable example of this phenomenon emerged with Carillion. Prior to its insolvency earlier this year, many Carillion suppliers were having to wait 120 days, and in some cases longer, before payment was made.
The impact of late payments on the UK economy is significant. Research by the European Commission examining business-to-business and government-to-business payments found that late payments were a direct cause of deteriorating cash flow positions, particularly for smaller firms.
According to a recent study by Small Business Insights-Xero, over half of SMEs in the UK are presently operating in the red. Data from the study of 250,000 SMEs showed that 50.5 per cent of them were operating with a negative cash flow last year. It also found that many of UK’s largest companies were paying SMEs late – 30-day invoices were being paid after 46 days, on average.
Mike Cherry, National Chairman of the Federation of Small Businesses has commented,
‘The UK is gripped by a poor payments crisis: over 30 per cent of payments to small businesses are late and the average value of each payment is £6,142. This not only impacts on the small business and the owner, it is damaging the wider economy.’
What about the Small Business Commissioner?
Beyond the PPC, another potential route for protecting the interests of small businesses must lie in strengthening the powers of the Small Business Commissioner (SBC). Introduced in 2016, the SBC is enshrined with powers to help small businesses resolve their disputes and also to consider complaints from them in relation to payment problems with larger businesses.
Last December, the government launched the SBC complaint handling service to ensure fair payment practices for small businesses. This coincided with the appointment of Paul Uppal to the role of Small Business Commissioner. He has the power to name and shame those businesses which do not honour the terms of purchases from smaller companies.
A Conservative MP from 2010 to 2015, and before that small businessman for 20 years, Uppal has suggested that the SBC be given greater powers to ensure that large business feel increased pressure to pay their suppliers on time. ‘Small businesses are crucial to the health of our economy so it is vital that they feel supported in all areas, but particularly in the fight against late payments,’ he said in April.
People who are chasing up late payments should go to the SBC for help.
But for that help to be given substance, Uppal wants greater powers for the SBC to punish miscreants: big companies should face hefty fines if they persistently pay suppliers late, he told MPs on the Business, Energy and Industrial Strategy select committee,
‘The ability to fine would bring more gravitas to the role,’ he added. More than that, the very real threat of large financial penalties would also force big companies to pay up quicker. Perhaps only then would SMEs begin to feel some real benefit in their squeezed cash flows.
Mark Gardner is a debt recovery and insolvency specialist at national law firm Excello Law