§ Question again proposed, That this House do now adjourn.11.32 am
§ Sir Peter Hordern (Horsham)
The House will be aware that pressure has been applied for some time about taking action on the late payment of bills which, regrettably, has become a feature of our commercial life in recent times. I accept at once that the Government have plans to encourage the prompt payment of bills, in particular by Government Departments. They are to be congratulated on that initiative. I do not think, however, that the proposals that require large companies to state in their annual report and accounts how quickly they pay their bills or the proposal that prime contractors or Government Departments must include a clause in their sub-contracts committing themselves to pay subcontractors promptly within 30 days go far enough.
Let us suppose that a prime Government contractor pays its suppliers within 30 days for Government business. What is to prevent that same firm, to compensate for that, delaying the payments to other suppliers for non-Government business? Why should it be only firms tied to Government contracts who pay their suppliers on time? The principle of taking action on late payment has been accepted by the Government for all their own contracts and I think that the commercial world would like to see similar action taken on late payment of bills for other contracts. The Government cannot seriously imagine that the prompt payment of Government contracts will in itself be sufficient to change what is now regular commercial practice—the withholding of payment long after the due date. Hon. Members are aware, from their many constituency and surgery cases, of the way in which large companies deliberately manage their affairs and cash flow in order to retain their money for as long as they can and to leave payment as late as they possibly can.
In the case of large Government contracts, subcontractors may have to declare that they will pay their bills within 30 days, but what is to happen, I ask my hon. Friend the Member for Gainsborough and Horncastle (Mr. Leigh), who I am so glad to see is to answer the debate, to the sub-contractors of the sub-contractors? They will know that the original sub-contractors for Government business will be tied to 30 days. Armed with that information they will then be able to borrow from their banks and delay payment themselves, which is a very convenient way of making money. That cannot be intended. It is a very bankable proposition. The bank knows that payment will be made by the main sub-contractor within 30 days, because that is a condition of getting Government business. Therefore I have no doubt that the sub-contractors to the Government sub-contractors will make full use of that bankable proposition. Unless my hon. Friend can advise me otherwise, there is no reason why all the stages downwards, through the sub-contractors for major Government business, should not also be tied to the 30-day rule. When he replies to the debate, I am sure that my hon. Friend will be able to give me the benefit of the expert advice that is available to him.
I am not the first hon. Member to raise the question of late payments in the House. Most recently, my hon. Friend the Member for Newark (Mr. Alexander) introduced a 639 10-minute Bill, just before the election. Before that, my hon. Friend the Member for East Hampshire (Mr. Mates) introduced a Bill making late payment a statutory offence, but his Bill, alas, was talked out.
I ask my hon. Friend to understand and sympathise with the position of small businesses today. I am sure that all hon. Members have had representations made to them by small businesses. During the boom, many of them borrowed on the security of their homes. I suppose that one could argue that they were ill-advised to do so and that they should have known better. But what business man would turn away business on the ground that he did not like the general outlook for business? What support does he have now from the banks? That is a new factor. One reason for raising this subject today is the extraordinary pressure that has been exerted on small businesses by the banks. As my hon. Friend knows, the banks are in a very severe mess, first because of their large loans to Latin American countries and secondly because of the huge loans to the property sector, lent on property values that have turned out to be grossly exaggerated. Now that they have lost all that money, or cannot claim it back for many years, they are turning to small businesses to get what they can out of them. They are calling in loans and applying pressure upon small businesses. That is a serious matter for all small firms and it is not surprising that they are in such difficulty. When one adds the unscrupulous practices of some companies deliberately delaying payment for goods and services as a matter of commercial practice the situation is very serious indeed. All the large companies are well regulated. Their payment systems are heavily computerised and notices of regret are sent out to small companies saying that an administrative hitch has occurred and payment cannot be made. That is a regular commercial practice and it is a disgrace. We know that it is going on and it is time that the Government took action to stop it.
Last February, the Right to Interest Group produced a table backed by the Forum for Private Business, Inter Justitia and Dun and Bradstreet. It showed that it takes 81 days from the date of invoice for the average business debt to be paid in England and Wales. That is 51 days after the average 30-day terms of payment and gives England and Wales the worst record in western Europe. The group complained that it would not be acceptable for German purchasers, who pay their business debts 18 days after settlement date, to wait 30 days longer for settlement of their English accounts.
I hope that I do not offend my hon. Friend's sensibilities, because I have never thought of him as a Euro-fanatic and I hope that he will forgive my saying that this is one matter where the Community is right and we are wrong. Interest rates are lower than a year ago, but they are high in real terms and will remain so for some time. Enormous sums are owed to banks, which have been instructed to press small business hard for payment. Many businesses are deliberately delaying payment as a matter of commercial practice. The Government seem to think that the problem can be met by them paying their bills on time, which they should anyway, and requiring sub-contractors to do so as well.
That response is quite inadequate. Nothing less than a change in the law will do. My hon. Friend the Minister 640 knows that the Law Commission studied this matter in 1978, before the problems were anything like as acute as they are today, and drew up a draft Bill as an appendix to the report. Lord Stanley of Alderley moved an amendment to the Administration of Justice Act 1982 designed to ensure that the Law Commission's recommendations were implemented in full. My right hon. and noble Friend Lord Hailsham—it is easy to see where his sympathies lay—opposed the amendment on the ground that it was controversial. Some bodies, such as the CBI, opposed the proposals, but the CBI would naturally do so. The Government have no duty to the CBI, which represents large and medium-sized firms which it suits to delay payment. That is how they make a lot of money. The Government have an absolute duty to ensure that the wilful delay in paying bills is ended. That will be achieved only by legislation. All other Community countries, except for Greece, Portugal and Ireland have such legislation. I understand that similar conditions apply in many American states.
What is wanted is the attachment of interest on late payment. Nobody in the House today would dream of paying their Inland Revenue bills late because of the consequences of doing so—interest is applied at once. Interest is applied at once if payment is late on our Barclaycard or Access bills. It is a simple matter to put right.
Late payment is a serious problem and small businesses, which face severe difficulty, need to be helped. I fear that the Government have not acted with sufficient force to correct this injustice, which will not go away. The Government must be seen to act, just as Governments throughout the Community and other parts of the world have already acted to ensure that the prompt payment of bills is an accepted standard. This abuse must be put right and I ask my hon. Friend the Minister to do what he always does—to excel himself when he has the opportunity and to make a firm statement about the Government's intentions.
§ The Parliamentary Under-Secretary of State for Technology (Mr. Edward Leigh)
With the leave of the House, may I welcome you, Mr. Deputy Speaker, to your new post? I am very pleased to see you in the Chair.
I am not sure that I can excel myself, but I appreciate what my hon. Friend the Member for Horsham (Sir P. Hordern) said about the importance of the problem. No one denies that late payment is a problem for business, especially small businesses. Outstanding debt has a severe effect on their cash flows and threatens their survival.
The House is indebted to my hon. Friend the Member for Horsham for initiating this debate. He rightly mentioned the difficulties that have been faced by small businesses in the recent recession and, to use his own words, I can understand and sympathise with the conditions under which they are labouring. I was going to deal with my hon. Friend's calls for legislation at the end of my speech, but as this is a timed debate I shall deal with them straight away and then return to what the Government are doing in seeking to set an example.
Many surveys confirm that businesses are worried about current payment practices. According to a study carried out for the European Commission in 1989 by Price Waterhouse, payment terms are regarded as a problem for 641 businesses in all member states except Denmark and Germany. In the United Kingdom, a survey by the Confederation of British Industry at the end of 1990 revealed that late payment was seen as a serious problem by most small firms. One in five small firms even thought its survival to be threatened by late payment. The CBI noted a marked deterioration in comparison with the previous survey four years earlier, in which only one small firm in 10 felt at risk. Delays of between 15 and 45 days beyond the terms agreed in the contract were common. One in five firms was accustomed to waiting more than 75 days to receive payment. My hon. Friend is right to highlight the severe problems that business is facing.
There have been calls from some quarters for the introduction of legislation, which my hon. Friend repeated, to tackle late payment through a statutory right to interest on overdue debts. We are keeping the issue under constant review, although it must be said—this is the difficulty under which we labour—that to date most organisations representing small firms remain sceptical that legislation will improve the late payment problem. The federation of small businesses, the CBI smaller firms council and the Institute of Credit Management have remained firmly opposed to legislation. Indeed, some argue that it could damage the small firm sector. They fear that legislation might encourage large firms with buying power to impose longer payment terms and that it would be used only against small firms.
I know a bit about the subject, because I well remember our hon. Friend the Member for East Hampshire, (Mr. Mates) introducing the Interest on Debts Bill in 1990. I took part in the debate when we devoted an entire morning in the House to the problem. We faced a problem then similar to that which we face now. There was a complete division of opinion among organisations representing small firms on the best way forward. Some point out that suppliers that are owed money would still have to take the customer through the court system, which they are reluctant to do for fear of losing future orders. Suppliers can stipulate credit periods and interest penalties as part of their contract terms under existing laws, although I accept that a small company looking for business is unlikely to want to impose difficult terms on an important customer.
We remain strongly committed to ensuring that the Government lead by example on prompt payment. Baroness Denton, the new Minister for Small Firms, is prepared to follow up personally any cases of alleged late payment to small firms by Government Departments. In addition, she is considering what other measures may be necessary to encourage prompt payment by other public sector organisations.
Let me say a little about what the Government feel that they can do. I am sorry that I cannot offer any obvious solutions to my hon. Friend other than to say that we recognise that there is a severe problem. There is also a division of opinion among those representing small businesses and we must keep that under constant review. For those reasons, the previous Minister for Small Firms asked all major Government purchasing Departments and their executive agencies to undertake surveys of their payment record during the financial year 1991–92. Departments were asked to provide information on the percentage of invoices paid within the agreed terms or, when none had been agreed, within 30 days. They were 642 also asked to ensure that they had in place systems that enabled them to continue to monitor their payment performance.
The results of the survey will be published shortly. The early indications are encouraging and suggest that the majority of Departments will report that they paid 80 per cent. or more of their sampled invoices on time. If so, that result will be in line with that of a survey undertaken by Graham Bannock and Partners in September 1991 into the attitudes among small firms of selling to Government. Seventy five per cent. of the small firms surveyed said that they had not experienced any delays in payment from Government Departments.
It is interesting to compare that result with experiences in the private sector in Germany where payment practices are generally considered to be exemplary. In 1991, agreed terms were observed by 73 per cent. of German firms. Therefore, the United Kingdom Government record would appear to compare very favourably with that of the Germans.
Government Departments and their executive agencies are well aware of the need for prompt payment to suppliers and contractors. Treasury guidelines to Departments state:The timing of payment should normally he stipulated in Government contracts. Where there is no contractual provision or other understanding, departments should pay within 30 days or on receipt of goods or services or the presentation of a valid invoice or similar demand for payment, whichever is the later".
Measures to strengthen the guidelines further were announced in the 1992 Budget. To help encourage prompt payment of bills by Government contractors to their sub-contractors, all Government contracts are to contain a clause requiring the supplier or contractor to pay its sub-contractors promptly. In the absence of normal practice to the contrary for that type of contract or other special circumstances, the commitment should be to pay the sub-contractor within 30 days of receipt of a valid invoice or similar demand for payment as defined by the contract.
I made a careful note of what my hon. Friend said about sub-contractors and sub-contractors of subcontractors. It is very difficult for the Government to go right back down the supply chain because, after all, we are talking about freedom of contracts for contractors. Sub-contractors can and should have payment terms in their contracts and enforce them in their credit management and, if necessary, in the courts. That is the most that I can say about the problem, which I recognise. I am grateful to my hon. Friend for raising it and, perhaps now that he has done so on the Floor of the House, we shall be able to consider it again.
Departments are also introducing their own initiatives to ensure prompt payment. The Department of Transport and its agencies, for example, have set up a number of telephone hotlines to help suppliers and their contractors with payment issues. Although that is very encouraging, it is not perfect. I recognise that and my hon. Friend is right to draw attention to it. I am aware that there are a number of problems, especially in the construction industry but time does not allow me to deal with that.
Where late payment to small firms occurs, the fault is by no means always with the Government Department. Many delays are the result of inaccurate or poor invoicing by small suppliers. One component of Government 643 measures to encourage prompt payment has been to provide guidance to small firms on how to invoice properly and introduce effective credit management systems.
The Government also have a responsibility to ensure that good services that they purchase are to an acceptable standard and that proper use is made of public funds. Payment delays will inevitably and quite correctly result where there are disputes over quality.
I shall now mention action to improve payment practices in the private sector, an issue which I know especially concerns my hon. Friend, although I am sure that he does not think it wrong for the Government to do what they are doing in trying to set a good example. Of course we want prompt payment to become normal practice, not only in the public but in the private sector. The Government have introduced a number of measures to encourage that.
In October 1991, we published "Making the cash flow", a guide to prompt payment for suppliers and customers, large and small. More than 75,000 copies have since been distributed to firms of all sizes and their advisers, and the guide has been very well received. It is aimed not only at customers to persuade them of the benefits of paying suppliers promptly but at suppliers to encourage better credit management. A recent survey for Barclays bank revealed that 46 per cent. of small companies surveyed were doing nothing to address their outstanding debts. In addition to changes to Government contracting guidelines, the 1992 Budget also included announcements of other measures to tackle late payment.
New company reporting regulations for large companies are to be introduced, which will require disclosure of payment performance. Suppliers would then be able to avoid more easily doing business with those firms where payment is or could be a problem. In addition, potential customers will be aware of which businesses are not treating their suppliers professionally and which, therefore, might also treat customers badly.
There will be improvements to small claims court procedures, making it easier for those chasing debts through the courts. A range of court reforms have already been introduced which are beginning to benefit those chasing bad debts. Summons requests can now be 644 processed within 24 to 48 hours through the summons production centre established in January 1990. Plaintiffs can issue most summonses in the courts of their choice, irrespective of where the defendant lives or carries on business. Certain functions such as applications to vary orders and for attachment of earnings orders have been devolved to court staff to fix rates of payment.
Procedures for dealing with business debtors have been standardised. Guidelines for court staff explain that if a business cannot pay its debtors, it should normally be wound up or made bankrupt unless a voluntary agreement, which is acceptable to the plaintiff, can be reached. As a general rule, judgments and orders should therefore ensure that business debtors are paid within three months. I am sure that my hon. Friend will regard that as a step forward.
Development funding is being made available to trade associations in sectors where late payment is a significant problem to support new prompt payment initiatives. These could include telephone helplines, counselling services, seminars on effective credit management and the development of common, sector-wide contract arrangements. We also welcome initiatives by others to encourage prompt payment. I was pleased to hear, for example, that nearly 400 companies have already publicly signed up to the CBI prompt payment code.
My hon. Friend mentioned European initiatives. The European Commission is about to publish proposals for EC-wide action on late payment. These are likely to address payment by the public sector and cross-border trading. We shall be consulting widely on the proposals and my officials will be keeping in close touch with their Commission colleagues to keep them abreast of the reactions to the proposals of small firms and their representative bodies.
Unfortunately from my hon. Friend's point of view, I cannot promise instant legislation because there appears to a difference of opinion in the business sector, but I hope that he will think that the Government are setting a good example and ensuring prompt payment of their contractors and, where possible, of their sub-contractors. we are also ensuring that we are not only setting an example by encouraging business to establish codes of practice to deal with this serious problem. The House will welcome what my hon. Friend has said and I hope that he is satisfied with what I have said in reply.