§ 3.7 p.m.
§ The Minister of State, Department of Trade and Industry (Lord Clinton-Davis)
My Lords, I beg to move that this Bill be now read a second time. At the outset perhaps I may welcome the debut of the noble Earl, Lord Home, on the Opposition Front Bench and say how eagerly I look forward to the maiden speeches of my noble friends Lord Sainsbury of Turville and Lord Stone of Blackheath, both of whom have immense business experience, and to that of the noble Lord, Lord Hardinge of Penshurst. I know that the House will be anxious to hear all of them.
It is said in Proverbs that,the borrower is servant to the lender".I am afraid that in modern commercial practice, all too often the reverse has become the case. Consequently, it should have been no surprise, particularly in the build-up to the election, that in our election manifesto the Labour Party promised to introduce a right to claim interest on the late payment of commercial debts. This was not an empty promise and our election success showed the country's support for the totality of the manifesto. I do not know why the noble Lord, Lord Strathclyde, should find that amusing. Certainly, the country had no regard for the totality of his party's election manifesto.
In the Queen's Speech on 16th May it was announced that legislation to provide the right would be brought forward during this Session of Parliament. Consequently, a Green Paper, entitled Improving the Payment Culture: A Statutory Right to Claim Interest on Late Payment of Commercial Debt, was published on 28th July outlining the Government's proposals. I am glad to say that more than 450 responses were received. I am delighted to bring forward this Bill which is the result of that consultation. The Bill will give suppliers a statutory right to claim interest from customers where commercial bills are paid late. Exercise of that right will be a voluntary matter and a matter for them alone.
It is important to put today's discussion in an historical context. The issue of interest is not new for the legislature and in presenting this Bill I should like 844 to illustrate where it fits into the current law. As long ago as 1893 Lord Herschell, in the London, Chatham and Dover Railways case, expressed strong sympathy with a claim for interest, going so far as to say that he would be inclined to give effect to it if the law permitted him to do so. That the law did not allow him to do so was, I shall argue, a failure not of the judiciary but of Parliament. Sixty years before in the Civil Procedure Act 1833, the legislature provided that interest could be claimed on a late paid debt where a right to claim interest or a right to interest existed in a contract and the right was properly invoked. As this remained the law up to 1893 and given the particulars of the case before him, it was not surprising that Lord Herschell, albeit with a good deal of sympathy for the plaintiff, found that interest could not be claimed. It was his view that the Civil Procedure Act 1833 placed excessive restrictions on the power to award interest. However, as the legislature had essentially been given the opportunity had it so wished to provide more extensive powers in the 1833 Act and had chosen not to do so, Lord Herschell did not believe that he could provide the remedy and extension.
Forty-one years later the legislature passed the Law Reform (Miscellaneous Provisions) Act 1934. Here we find the power to award interest being advanced in a limited way in the interests of justice. I shall not read out Section 3(1) of the Act. I simply refer your Lordships to it and summarise its essence. The section provided any court of record with the power to include in any judgment on any debt or damages interest at a rate it thought fit from the time when the cause of action arose to the date of the judgment. That was a major step forward but it applied only to courts of record and, most importantly, only where the debt remained outstanding at the time of judgment.
In 1974 the Lord Chancellor, Lord Elwyn-Jones, requested the Law Commission:To consider the law and practice relating to interest on debt (where interest has not been provided for by contract) and on damages, and to make recommendations".Some four years later the Law Commission made its report to the Lord Chancellor, including a draft Bill which, had it been adopted as a whole, would have provided a right to claim interest where a debt is paid late before any proceedings; where a debt is paid late after proceedings for its recovery have begun but before they have concluded; and where a debt remains unpaid until a money judgment is given following the conclusion of proceedings for recovery of the debt. The last point mirrored the 1934 Act. It is unfortunate that the government in power in 1982 saw fit only to give effect to part of the draft Bill. The Administration of Justice Act 1982 amended the Supreme Court Act 1981 to provide the courts with the discretion to award interest where a debt was paid late after proceedings had begun regardless of whether or not the proceedings concluded in a judgment on the principal debt. It still left suppliers who were paid late but before proceedings were issued unrecompensed for being kept out of their money.
845 It is 165 years since the Civil Procedure Act 1833 began the development of formal law on the provision of interest on late paid debts. It is my hope that the Bill before the House today will complete the evolutionary cycle. It returns to the recommendations of the Law Commission in 1978 and finally gives all suppliers regardless of when they are paid the right to claim interest on late paid commercial debts. In essence, then, the Bill is a simple extension of the current law, but behind it lie some fundamental views of this Government. We believe that businesses must try to be ethical, trustworthy and competitive. Many years ago when I was a Member of the other place I recall visiting a firm in which the following notice was exhibited:In God we trust. All others pay cash".Wherever practical I should like to see businesses trusting each other rather more than that.
Let us examine the ethical question here. Surely, we can all accept that paying late is wrong and unfair. Any late-paying organisation is effectively saying that it does not value its suppliers or care enough about them to foster good relationships. Where an agreement has been reached as in other walks of life and elsewhere in business practice it should be honoured. Of course, different reasons exist for late payment, some of which we listed in the Green Paper, Improving the Payment Culture. They include deliberate unjustified delay to procure an unfair financial advantage; disputes over the provision of goods and services; temporary cash flow difficulties; administrative errors by either supplier or customer; misunderstanding or uncertainty over the agreed credit period; "pay when paid" contract terms; breakdown in payment systems; and an inability to pay due to insolvency or something close to insolvency.
Where a company cannot pay because it is insolvent there is little that can be done. But where it is for any other reason, aside from their own administrative error, why should suppliers have to bear the cost? They are not at fault. It is time that customers stopped using their suppliers as providers of credit without their agreement and resolved to honour their contracts. It is the Government's firm belief that the cost of late payment must be put back into the hands of those who can control it; the customers themselves.
I turn briefly to competitiveness. How many times have we heard of businesses that pay late because they think it is good business practice? It is not. Businesses must learn that. The costs of the supplier are the costs of the customer. Late payment is a payment made after the expiry of the agreed credit period. The supplier who has had an expectation that he will be paid before the expiry of the credit period finds his expectation to be ill-founded. Economically, the expectation is crucial. How can the supplier price his goods or services properly if he cannot be sure when he will be paid? If credit periods are ignored the supplier will start to increase his prices to cover the risk of late payment. This is an endemic problem in the economy. All businesses are faced with the cost.
The cost of the cash flow risk to the individual business is most plainly seen in the interest rate at which the supplier can obtain agreed loans from the bank. The 846 rate is likely to be higher if there is a strong risk that the business's cash flow will be disrupted by late payment. I believe that all Members of the House agree that uncertainty is not good for business, especially smaller suppliers, or for the stress levels of its financiers. The upshot is higher prices. Customers who pay late add to their own costs: it is time for the absurd practice of late payment, which is all too rife, to be stopped.
The Bill before the House will encourage customers to pay on time, thereby working to eliminate the costly late payment problem. On the other hand, should late payment persist the supplier will be able to claim interest to cover the increased cash flow risk caused by late payment. The cost will no longer be borne by the supplier but by the late paying customer. I assure the House that this legislation is sadly needed now by business. The Green Paper which I mentioned set out the Government's proposals for a statutory right to claim interest on late paid commercial debts. Those proposals received widespread support. For example, the Institute of Directors received 1,700 responses to a survey of its membership, 69 per cent. of which favoured a statutory right to interest. In a concurrent survey by Graydon, a leading debt recovery and credit risk management company, 65 per cent. of respondents were in favour of the Government's proposals. I commend to your Lordships the summary of responses published by my department on 11th December. The charts in it are startling. All the Government's proposals received strong support. In light of that consultation we amended some proposals but the underlying policy remains unaltered from the Green Paper.
The results of the consultation exercise were not a complete surprise. What is a surprise is that the previous government did not provide the right earlier. A Cork Gully Report of 1991 for the CBI found that almost 60 per cent. of businesses regarded late payment as a significant problem. A survey for the British Chambers of Commerce and Alex Lawrie in 1994 found that 85 per cent. of respondents were in favour of a statutory right to interest. In 1996, 75 per cent. of respondents to a Lloyds Bank survey supported a statutory right to interest. It is only now, with a new government committed properly and wholly to competitiveness and economic growth, that action is being taken.
It would be churlish of me if I failed to mention that the previous government did at least in 1993 consult the business community on the merits of legislation for a statutory right to interest. Although the majority of respondents were in favour of legislation, which should not have been a surprise, the government announced in the 1994 competitiveness White Paper, paradoxically entitled Helping Business to Win, that they would not legislate. Instead, they announced a number of measures to help tackle late payment. They did make a commitment to review the case for legislation within two years if there had not been a significant improvement.
In January 1996 the then government consulted business organisations again and announced in May of that year in Your Business Matters—The Government's Response that they had decided against legislation on the grounds that it was likely to be used against small 847 firms rather than by them; that it could lead to longer payment times; and that it could legitimise late payment. Soundings on our own proposals have shown that most of industry believed that approach to be wrong. We believe that the problems identified can be resolved by well drafted legislation.
I turn specifically to criticisms of the Bill's proposals. I shall take each main criticism in turn; no doubt others will be revealed during the debate. First, it is said that the legislation will be used against small businesses. Of course, it is possible that the legislation might he used against small businesses. If they pay late then they must accept the consequence. While the Government can see no reason for large companies to pay late, given the resources at their disposal, they recognise that some small firms may not have the credit management systems to ensure that they meet all their payments on time. That was recognised by the previous government. Measures have been, or are being, developed in partnership with the private sector to help small businesses which may have limited resources to develop the necessary systems. Those measures should be given time to assist small businesses before giving their business suppliers the opportunity to claim interest from them.
For that reason the Government intend, as set out in the Green Paper, to phase in the commencement of the Bill. When the first commencement order comes into force, the statutory right to claim interest will be exercisable by small businesses against all large enterprises, including the public sector. We envisage that the right will be extended, after a period of two years, for use by small businesses against all enterprises of any size, including the public sector. Finally, we envisage that the right will be extended, again after a further period of at least two years, to all enterprises, including the public sector, to use against all corresponding enterprises. Through that phased approach all businesses will be given the opportunity to implement systems that will allow them to pay their bills on time. Should they fail to do so, then, of course, they open themselves up to claims for interest.
The second main criticism is that the legislation will lead to longer payment times. The previous government said that a statutory right to interest would lengthen payment times. That seems to be missing the point altogether. A statutory right to interest, as I outlined earlier, is a tool to prevent late payment and the cash flow risk that it engenders. As long as suppliers know when they will be paid they can manage their cash flow. If they can only guess when they will be paid, then it is that which brings risk.
There is criticism that the legislation will legitimise late payment. I do not accept that. Late payment is never legitimate anyway. It ends up costing the company more money in the long run. By setting the interest rate at a level which both deters late payment and recompenses even the weakest companies for being kept out of their money, many businesses will find that paying late is no longer a cheap option in the short run either.
848 Having necessarily taken some time to detail the background to, and rationale of, the Bill, let me turn to its format. Part I sets out to which contracts and debts the right will apply and from when interest will accrue. It also provides a power to set the rate of statutory interest by order of the Secretary of State. I confirm that it is the Government's recommendation that the rate of statutory interest be set at base rate plus 8 per cent. We have been advised by the Bank of England that that is the rate at which the weakest businesses may obtain agreed overdrafts or term loans. That is of course a departure from the suggestion contained in the Green Paper.
I turn to Part II. If the legislation is to be effective in curtailing late payment, it is necessary to restrict the ability of businesses to contract-out of the legislation. The Government, in drafting the legislation, have sought to limit restrictions on the freedom of contract to the bare minimum consistent with the philosophy of the Bill. Businesses will be able to negotiate their own contractual remedies for late payment unless such remedies are inadequate for the purpose of compensating the supplier or deterring late payment, and it would not be fair and reasonable to allow the term to oust the right to claim interest under the Bill. The courts will be able to strike down contractual remedies that fail those tests. Such remedies may include offers of nugatory interest or the imposition of excessive credit periods.
Part III deals with the treatment of advance payments of the contract price; the jurisdictional extent of the Bill; assignment and separation of the right to interest; and the definition of terms in the Bill. It is important that business should be able to pursue a claim for interest, even if the principal has been paid, and to be able to assign the right to that interest to a third party. By bundling together a number of claims, a third party would be able to pursue the interest more cost effectively.
I wish specifically to direct the House to the final clause. This includes a commencement power that has been drafted to permit the Secretary of State to introduce the statutory right to interest in transitional phases. I have already outlined how those phases will operate. The first commencement order will define a small business. We intend that a company be considered small if it has 50 or fewer full-time employees or part-time equivalents. Ninety nine per cent. of businesses will qualify as "small" businesses under that proposed definition. Those businesses represent nearly 46 per cent. of private sector employment. That indicates just how important the Bill is, and how consistent it is with our determination to ensure the increased prosperity and competitiveness of SMEs.
The Green Paper had suggested using the definition in the Companies Act. However, as that might change and is not wholly transparent, we have recommended relying on the third element of that definition alone—the number of employees. That meets our concern to ensure that the legislation is transparent and easy for the lay person to use.
849 I apologise for speaking at greater length, on a short Bill, than I would have chosen. Some may say, "That is of characteristic length for the noble and learned Lord". However, I wish to conclude by making two important points. First, we recognise the importance of research on payment best practice during the phasing-in of the legislation. To that end the Government have commissioned work from Bradford University and we will seek similar support from the private sector. It is important that we are kept informed of what is happening in practice. We shall build on the emerging practice of large companies in setting out in their annual reports their record of payment of debts on time. That is a commendable practice and I hope that it can be widened.
Secondly, I do not wish to leave the House with the impression that we see this legislation as a panacea for the problems of late payment. We know that that is not the case. It is but one measure in a package of measures which the Government are following in partnership with the private sector in order to improve the payment culture. Advice on credit management, league tables of payment performance, the reform of access to civil justice—and, in this context, use of the small claims courts procedures is important—and support for payment standards and national vocational qualifications have a role to play in improving the payment culture. This legislation is the backstop. Where a supplier has done everything right and still finds that payment is delayed, I believe that the Bill will give the supplier the weapon that he needs, if he wants to use it.
The Bill constitutes a rebuttal of the Oscar Wilde thesis, which is:I don't want money. It's only people who pay their bills who want that and I never pay mine".I believe that the Bill is important. In time, it will be seen to be of great value to small and medium-sized enterprises in particular, and I commend it to the House.
Moved, That the Bill be now read a second time.—(Lord Clinton-Davis.)
§ 3.32 p.m.
The Earl of Home
My Lords, I thank the noble Lord, Lord Clinton-Davis, for his kind welcome and I look forward to further opportunities to debate matters of mutual interest. Furthermore, we on these Benches look forward to the contributions of the noble Lords, Lord Hardinge, Lord Sainsbury and Lord Stone, who are to speak later in the debate for the first time. No doubt they have had different experiences from the rest of us and we shall listen with great care to what they have to say.
I am pleased that through the publication of the Bill the Government have at least shown that they are prepared to continue some of the work which the Conservative Government did to address the problems faced by small and medium-sized enterprises. SMEs, if I may use the initials, have problems which larger corporations do not and it is self-evident that late payment and had debts hurt small businesses much more than their larger brethren.
850 No one would dispute the importance of SMEs to the health of the country. Perhaps I may make it clear at the outset that the Conservative Party does not under any circumstances condone the deliberate unjustified late payment of bills, particularly by organs of government or by major corporations, especially if the sufferers are those in a poor position to fight back because of their size or status.
The greatest service which any government can give to SMEs is to provide the best economic and financial environment in which to operate. The Conservative Government provided those conditions with sustained low inflation and low basic rates of tax. Therefore, it is hardly surprising that there are 1 million more companies in this country than there were 15 years ago and the great majority of these are SMEs. In the private sector, some 35 per cent. of all firms employ fewer than 20 people and about half employ fewer than 100.
However, SMEs have considerable growing pains and the management of often meagre resources, in terms of both capital and bank facilities, is often stretched to the limit. There is a natural and understandable desire by the founders of small enterprises to keep control over all aspects of their business. These people are often inspired inventors, good retailers, excellent producers and fine marketers. However, often they are less interested in the financial side of their business, which is regarded as a necessary evil.
Last summer we had an excellent debate in this House following the publication of a report by the Select Committee on Science and Technology, chaired by my noble friend Lady Hogg, on the problems faced by SMEs in attracting capital into small businesses. It is good that today we have a chance to look at another factor which affects such companies, namely late payment. However, what worries me today is the way in which the debate has come about. We are not looking at a report produced by an erudite committee, as we were last summer, but at a Bill which we know is thought by many practitioners involved with SMEs to be premature or unnecessary.
In 1995, the Conservative Government issued the competitiveness White Paper, Forging Ahead, which urged smaller businesses to put forward their views on what type of policies would assist them. A series of conferences led by the Institute of Directors, with excellent participation from, inter alio, the Federation of Small Businesses and the Forum of Private Business, produced some interesting results.
During these conferences, which culminated on 11th March 1997, among other topics, we considered and debated with SMEs the option of statutory interest payments on late debt. That consultation was complemented by a five-month review launched in January 1996. The Minister mentioned that consultation, but he did not mention that eight out of nine small business representatives opposed compulsory interest payments on late debt because of the negative impact that could have on their members. In my view, the Conservative Government rightly supported eight out of the nine.
851 Draft regulations were also laid before Parliament on 24th January 1997 by the then Minister for small businesses. They required each public company and each large private company within a group headed by a public company to state their payment practice in their directors' reports. Those statements provide information on how long on average it has taken the company to pay its bills. Requiring companies to disclose their payment performance will bring about greater transparency and will help small firms to monitor year-on-year payment records of larger companies with which they may consider doing business.
In September 1996, the new British Standard on payment performance (BS7890) was launched. That standard requires companies to handle transactions transparently, fairly and promptly, to provide clear documentation and to settle disputes quickly. Government departments were required to sign up to it.
The previous government, for good reasons, took the steps which I mentioned to tackle those problems and I believe that those steps will pay off. Regardless of the Bill, if it comes into law, I expect some continuing improvement in late payment statistics during the next few years as a result of the actions which we initiated. We on these Benches will therefore monitor the figures carefully, because I believe that the existence of a statutory rate of interest will have little or no extra effect on that trend.
Furthermore, I should like the Minister to tell us why the Bill is being brought forward now when we understand that a directive from Brussels on the topic will shortly be issued. Is this Bill not premature, or does the Minister already know what the directive contains? Is the content of the directive consistent with the content of this Bill? If it is not, are we to readdress this whole topic shortly after this Bill reaches the statute book? This proposed piece of legislation is quite complicated for the small businessman and it would be a nightmare for him to have to learn a new set of rules just after he has mastered the first set.
Last year the Federation of Small Businesses said of the proposal for statutory interest:In all likelihood, Labour saw the issue as a headline grabber. A statutory rate of interest will not change the late payment culture".I share the federation's fear that this Bill may turn out to be a high profile attempt by the Government to be seen to be doing something for SMEs when in fact it will merely solve one small part of one of their difficulties.
Large figures have been quoted in relation to late payments. Some £20 billion was quoted as currently financing trade credit. However, those figures are meaningless unless the reasons for slow or late payments are analysed. Analysis shows that well over half of all late payments are due to administrative inefficiency at the supplier's end. A survey carried out by the REL Consultancy Group showed that 30 per cent. of invoices contained some error and that up to 90 per cent. of payment delays are due to disputes in relation to wrong price, wrong quality, delivery notes not issued or terms not agreed in advance. In such instances, it is 852 perfectly proper for the purchaser to withhold payment for, although he is contributing intentionally to a late payment problem, he is not doing so maliciously. If the supplier could be taught to produce the right product at the right time to the right specification and then send the right invoice with the right reference to the right address, a large part of the problem would disappear.
There are some purchasers who are unintentional late payers. Again the evidence suggests that many small firms which pay late often do so through incompetence or because a manager doubles as a finance controller and does not get round to paying his bills on time. Again, those instances are not malicious and should be capable of amicable settlement between the parties involved without recourse to law.
The real culprit is the malicious late payer who delays settling invoices because that will help his own cash flow and he believes that the supplier will not dare take him to court for fear of loss of future business. Again, according to surveys carried out, those offenders are comparatively few and some, even some very large corporations, can be persuaded that their policies will rebound against them and they will face increased prices or lesser service in the longer term.
There is the proposal that companies or government organisations which are thought to be maliciously taking advantage of the minnows supplying them should be named and shamed into improving their treatment of creditors. We support that proposal wholeheartedly for it is unacceptable that they should be allowed to take unfair advantage purely because of size or status. Nor indeed has the Conservative Party ever hesitated to criticise strongly those who maliciously pay their bills late, even those in the public sector. My noble friend Lord Lang, the then President of the Board of Trade, said in 1996 that it is not right that government departments should let their payment performances slip.
However, this Bill will not force government bodies or big business to behave better. The Minister quoted many statistics. There is another statistic which shows that if the statutory right of interest existed, 59 per cent. of small businesses would not enforce it for fear that the customer would not pay and would take his business elsewhere. There is also a danger that malicious companies with power will simply force smaller enterprises to extend their contractual payment terms by the number of days that in the past they have paid late.
But it would be wrong to place all the blame on big business or government. Some big businesses behave extremely well towards their smaller brethren. The bulk of trade by SMEs is with other SMEs and, by and large. they have more cash flow worries than the large institutions or government agencies. Small purchasers may well pay late because they have genuine cash flow problems, but they are simply transferring their own problems to someone else.
The facts are that following initiatives taken by the previous government, the situation shows some sign of improvement, although it is early days to judge some of those results. Government departments and agencies have often attracted criticism but they have now agreed to abide by the CBI prompt payers' code and to 853 publicise their payment performance. In due course we shall see from the figures whether that discipline will achieve the desired effect. But in the meantime, we should wait to see whether the trend continues.
The European Commission's report on late payments in commercial transactions shows that between 1995 and 1996 in the United Kingdom the number of overdue days in payment decreased from 23 to 22 while the contractual credit period remained the same. No other country in Table 2 of the Commission's report achieved more than we did; namely, an improvement of one day. In Austria, Belgium and Italy, average payment periods increased from 1995 to 1996 and all those countries have late payment penalties.
Although only seven countries are mentioned in that table, the Commission's report last year on 9th July stated that, by the time accounts payable are 30 days late. the United Kingdom's record is second only to Germany, and at 60 and 120 days late we have the best record. Indeed, Germany has the worst record when one looks at 120 days payment. The evidence in that report demonstrates that the poor payment disease is endemic throughout Europe despite many countries having statutory late payment penalties. The United Kingdom, so often cited as a poor performer, is overall no worse than many and is indeed better than some.
The Green Paper which the Minister mentioned states:The right to interest on overdue payments is found also in Spain. Legislation there has existed since 1985 and the average overdue payment period is just 6 days".That statement is extremely misleading. It gives the impression that the SRI has made a great difference. But the average contractual period in Spain is 68 days. Therefore, the average payment period is 74 days, which is 25 days longer than in this country. Indeed, it is possible that in Spain the contractual credit period was shorter prior to 1985 and, in order to avoid interest payments, big business forced small suppliers to extend the contractual credit period which is offered. The Government cannot hold out Spain as a shining example of a country where SRIs have worked without producing the statistics prior to their introduction there. In any event, I venture to say that to quote a country with a 74-day average payment period is hardly something of which the Government should be proud.
There are several other points in the Bill on which we shall be seeking explanation from the Government both in Committee here and in another place. To the extent that the Bill applies to exports from this country, I believe it to be totally irrelevant. I do not believe that exporters will run the risk of extending contract negotiations or, indeed, losing a potential sale by trying to explain to foreign purchasers why they should pay interest on a late payment. Exporters will simply ignore this Bill.
We will also be asking the Government to tell us why the rate of interest formula cannot be on the face of the Bill. As drafted, the rate of interest can be purely the whim of the Secretary of State. The Secretary of State apparently does not have to consult the Treasury, the Bank of England or any other part of government 854 involved with finance. I have myself been involved in many negotiations on export contracts and default interest, both under the auspices of the Export Credits Guarantee Department and on straight unguaranteed sales. It is hard enough explaining to a foreigner the rationale for default interest under a tried and tested system such as the ECGD system, but I shudder at the thought of trying to explain to a foreign purchaser why he should pay a rate of interest which may have been set by an individual with no financial experience and without reference to anyone who has such experience. We should be told what the formula is.
The Minister said that the rate of interest should be 8 per cent. over base rate. However, as I understand it. Brussels is talking about a penal rate of interest. How are these two reconciled? Is the Minister's proposed formula the rate that will endure, or do we go back to the whim of the Secretary of State? On this, I believe that the Government have been even more dictatorial with Parliament than usual, always assuming that they have decided what the formula should be.
Those and other points, such as the phasing in of the provisions of the Bill, need much clarification both in this House and in the other place. While we from these Benches agree that it is laudable and right to penalise wilful late payers, we do not believe that this piece of legislation will achieve that end. We shall continue to press the Government to improve it.
§ 3.53 p.m.
§ Lord Ezra
My Lords, in his opening speech the noble Lord, Lord Clinton-Davis, gave us the reasons why the Government consider that it is now right for legislation to be introduced for late payment. The noble Earl, Lord Home, gave us the reasons why he did not believe that this was an appropriate way of dealing with the problem which he admits exists but which he believes should be dealt with in another way. I should explain that we from these Benches have long advocated a statutory right for payment of interest on late debts and, therefore, we support the broad thrust of the legislation. Despite attempts over recent years to achieve better payment of commercial debts by voluntary means, there are still widespread delays in payment which in extreme cases can put some smaller firms out of business.
I should like to commend the Government on the way in which they have handled the matter. As the Minister reminded us, a consultation paper was issued in July 1997, after which a very useful summary of responses to the paper was produced in December. The Government took account of a number of views then expressed and have intimated that they will also take careful note of comments made during the Bill's passage through Parliament. I trust that that excellent procedure can be followed in future, especially where there are technical aspects to the proposed legislation.
The case for introducing a statutory right to claim interest on late payment is clearly made out on page 7 of the consultation document. The majority of businesses regard late payment as a significant problem. The extent of late payment was revealed in a report issued last 855 October by Dunn and Bradstreet, the business information service. In a survey of 86,000 companies, it showed that less than 20 per cent. of businesses pay their bills on time. Delay is more widespread among larger companies than smaller ones. That seems justification enough for the Government's proposed legislation.
However, there is also general agreement that legislation of this sort cannot, of itself, transform the payment culture. Indeed, that point was made by both previous speakers in today's debate. Some people feel that small firms would be reluctant to press for interest on late payment because of the risk of jeopardising their long-term business prospects. That point was also made by the noble Earl. So the legislation must clearly be buttressed by a series of other measures. In my opinion, three are of particular importance.
The first is the need for an effective legal system to enable a creditor effectively to enforce the statutory right to claim interest. The Green Paper sets out on page 10 ways in which small businesses could use the courts more effectively in enforcing their right to interest. The Lord Chancellor is currently reviewing proposals for the reform of the civil justice system with a view to reducing delay and costs. Respondents to the Green Paper were clearly concerned about existing legal arrangements. They consider that access to justice should be made easier and quicker and suggested that the small claims court limit should be increased and that there should be better enforcement of county court judgments. Clearly the issue of court access and enforcement of judgments is crucial to support the legislation on late payments.
Secondly, there should be publication of the details of the payment performance of public companies. That is to be undertaken by the Federation of Small Businesses on the basis of information now contained within companies' accounts, to which the noble Earl referred.
Thirdly, credit management procedures must be improved. A part of the difficulties that small firms in particular encounter in getting prompt payment is created by delays and errors in invoicing. Again, the noble Earl also mentioned that point. The DTI has published a guide on credit management and debt recovery and supports other measures to bring about better credit control among smaller companies. Associated with that are the efforts to promote the adoption of BS7890 (the British Standard) for achieving good payment performance in commercial transactions. The document setting out the responses to the Green Paper indicates a number of ways in which the payment culture can be improved.
An aspect which has stimulated much discussion, and one which was also raised this afternoon, is the proposed phasing of the introduction of the statutory right to claim interest on late payment. It is intended that this should be done by order under Clause 15 of the Bill. The Government's phasing proposals are set out on page 12 of the consultation paper and were also referred to by the Minister. They consider that a four-year phasing-in 856 period is necessary to enable small businesses to adjust effectively to the legislation. However, it can reasonably be asked whether this is not too long a period.
Further, the distinction between small and large businesses is not entirely satisfactory. A small business is defined as one employing no more than 50 persons. Therefore, by inference, a large business is one employing more than 50 persons. It has never been my description of a large business that it should be employing, say, 51 persons. There are large numbers of businesses employing between 50 and 100; indeed, up to 200 persons. If it is intended to keep the definition of a small business up to 50 persons, then I suggest that there is a strong case for eliminating phase 1 (small businesses claiming against large businesses and the public sector) and moving straight away to phase 2 (small businesses claiming against all businesses and the public sector). At the expiry of two years the procedure would be opened up to all businesses.
It seems to me that there would be a number of advantages in this alternative. First of all, it would speed up the process. Secondly, it would avoid any difficulty in small businesses wishing to claim interest where acting in relation to a so-called large business and determining whether or not it was a large business according to the definition. There would undoubtedly be a grey area between the firms employing up to 50 and those employing more than 50. Thirdly, it might be argued that small firms could feel more at ease in a system which applied to everyone, rather than one that applied specifically to them. They might feel themselves somewhat less exposed to larger businesses in a generalised scheme from which larger businesses also could benefit. This would support a shorter phasing-in period.
I wish to raise a question in connection with the European Commission which is very much on the lines mentioned by the noble Earl. The Commission is due to bring forward a directive on the right to claim interest on late payments, but the directive itself is late. It was intended to have been produced by the latter part of last year, but it is still apparently some time away. The Government state that they wish to work closely with the Commission to ensure that the directive and UK legislation are consistent. The question is, how would the Government deal with any inconsistencies if the directive were still delayed after the present Bill was enacted? The Bill represents an important step towards changing the payment culture. We therefore support it in its broad thrust. But to be really effective it must be accompanied by other measures and these, in our opinion, are just as important as the Bill itself.
§ 4.2 p.m.
§ Lord Hardinge of Penshurst
My Lords, may I first of all take this opportunity to thank the Members of your Lordships' House for the kindness and generosity of my welcome here in recent weeks, to thank the staff in similar terms, and to thank particularly everyone who has helped me with procedures, geography and research. My blunders will naturally be my own; but the space where many other blunders would have been will be mostly theirs.
857 I have been a bookseller for over 25 years. Currently I work for a medium-sized independent Scottish company, running its library supply and export division. I have worked for several small companies and never for a really large one, although my present employers are "un-small" by the definitions of the present legislation. I should mention that I sit on the export committee of the Booksellers Association and I am a director of Book Tokens Limited, which runs the booksellers' payments clearing house.
In case any mild carping that I may do should give the impression that I oppose the Bill, I should say at once that it seems to me justified in principle and correct for reasons already put forward. Suppliers are entitled to be paid to time. Exhortation is unlikely to achieve much; in fact, exhortation has already not achieved much. Legislation would be at minimum a powerful signal of disapproval towards the worst current practice. The other most powerful signal the Government could give would be to achieve their own targets. I particularly treasure the assertion that,public sector bodies are currently expected to pay bills within 30 days and so should already have the necessary payment and monitoring systems in place".When the three months and over debtors schedule lands on my desk around the 10th of every month, public sector bodies are always notable by their presence. There are of course shining exceptions but that is the rule. There is plenty of work to be done in this area. I think, too, that paying in due time will turn out to have a significant impact on public sector administrative and financing costs. It is fair to say that UK public sector bodies are generally angels of light compared with their overseas counterparts.
The principle of the Bill, then, seems right, and the increased pressure it will put on public sector bodies seems mostly desirable. There remains the concern that large debtors can still bully small creditors in various ways. As one who has signed various outrageous contracts with large customers, I am sure this is true, but the obvious way of doing it—negotiating longer credit terms—represents some improvement over the present situation because of the greater openness. At present, a bidder for a contract may suspect that the purchaser will not pay to time, but it is hard to be sure. That uncertainty pushes everyone towards bidding on the basis that payment will be to time; and the untruthful are rewarded. But if a company asks for bids on the explicit basis of, say, payment in 120 days, the situation is different. The price will tend to rise in line with the expected cost of borrowing the money for the specified period. In fact it will tend to rise in line with the expected cost to the bidders of borrowing the money for the specified period. If the bidders are smaller than the purchaser, and the purchaser has access to cheaper funds, it may well be in the purchaser's interest to specify a short payment time.
But what about the creditors if this does not happen, and payment terms are extended? To my mind certainty is at least as important as actual payment terms. In my experience banks are pretty happy—sometimes too happy—to lend money against a known revenue stream. It is when the stream fails to flow that they become 858 upset because they wonder whether one knows how to manage one's business. The present legislation will not of course produce complete clarity, but it can hardly fail to improve the current situation.
Having said that, practice and theory can be a little different. I think my employers are not untypical of the book trade, which is the only trade that I know at all well. We have nearly 30,000 suppliers, which is about 150 suppliers for every member of staff, and the number increases relentlessly. Negotiating any kind of special deal with more than a few hundred of the biggest is clearly completely impracticable. For the rest there is almost never a formal contract. In a typical month four members of staff in purchase ledger process between 25,000 and 30,000 invoices from a random subset of these 30,000 suppliers. Presumably this mountain of transactions—usually but not always small—will be regulated by some mixture of the present Bill, normal trade practice where that can be determined, and whatever conditions happen to be on the back of invoices. These are invariably unread even if they happen to be in English rather than in Dutch or Japanese.
I mention this because in this environment the only way order can be imposed on the proceedings is by doing one main payment run for these smaller suppliers at the end of each month. This normally includes invoices dated the previous month. Book trade structures such as the clearing house which I mentioned earlier have been set up to function on this basis. While page 11—I think it is page 11—of the DTI's summary of responses to the Green Paper seems to assert that businesses can trade on the basis of single monthly payments where this is trade practice, I see nothing to that effect in the Bill. The cash flow implications are not too serious, as the sums are usually not a huge proportion of total purchases, but the administrative work is potentially appalling and some comment on that would certainly be appreciated.
The final matter which concerns me is to do with exporting, and I have already declared an interest. The exporter is likely to be paying UK suppliers sooner than previously. After all, that is the point, and I am confident that changing the balance of power from retailer to supplier will make it harder to negotiate special export terms, in addition to the continuing difficulty of negotiating with very large numbers of suppliers. But payment will arrive at the same time as it did before, so exposure is likely to increase. Imports may well become relatively more attractive—I can think of one or two examples in our own practice—for the same reason. I do not know whether the Government have considered the implications of this and whether any reassurance can be given.
I shall not trespass upon your Lordships' patience much longer. Many years ago when my father was finishing his maiden speech here, he commented that he had been advised to be both brief and dull, and that he had had no difficulty in following that excellent advice. I have been rather less brief, and much duller, so it only remains for me to thank those present once again for their patience.
§ 4.10 p.m.
§ Lord Borrie
My Lords, it gives me very great pleasure to follow the noble Lord, Lord Hardinge of Penshurst, who has delivered a notable maiden speech. He speaks from his immediate business experience. As he indicated, he has been a bookseller for 25 years. I am not sure whether he mentioned that his main seat of activity at present is in the city of Glasgow. He mentioned his work with the Booksellers Association. He has spoken from great experience of the commercial and business world. However, the first Lord Hardinge of Penshurst was a great public servant as Viceroy of India earlier in the century; and the noble Lord's grandfather performed great public service as private secretary to Their Majesties King Edward VIII and King George VI. The noble Lord made a notable speech today. As is often said in this House, we look forward to hearing him again. However, I say that especially because he will then be able to combine the public service of some of his ancestors with the commercial service of his father and himself which has been so helpful to us today.
The only problem I have with the legislation being introduced today is a fundamental one. Should the law intervene to provide a non-excludable right to claim interest on the late payment of a commercial debt when the commercial parties to the contract themselves have not agreed that such interest should be paid?
I have no doubt that when a business enterprise receives the benefit of goods and services and deliberately, or, as the noble Earl, Lord Home, put it several times, maliciously, fails to pay up in due time that is ethically wrong. There can be no doubt in any part of the House about that. It is immoral and shabby conduct in particular when the supplier is a small business so dependent on cash flow. It is shocking that a former Deputy Prime Minister should have boasted that paying late in respect of debts due was a practice he regularly engaged in when he was in business. Money delayed is money denied. The supplier is prevented from having the use of money that is rightfully his until such time as the debtor, in his own good time, chooses to pay up. In the meantime the supplier is cheated out of his entitlement.
Opponents of the Bill say that it is already quite possible to insert by way of a contract term an interest sanction on firms which pay late. Of course that is so. But it is rarely likely to be practical, in particular for a small business, to insist on a right to interest being provided for in the terms of the contract. That in a nutshell is the value and justification of the statutory right to interest introduced by the Bill.
I do not believe that every possible instance of immoral or unethical business conduct should necessarily be made unlawful. But, to put the Bill into some recent context, in recent years—I think of Bills introduced by governments of different political colours—it has become increasingly necessary for the law to reinforce ethical standards, especially in order to try to even out the imbalance of power that exists between business and the private consumer and big business and small business. Hence in recent years 860 various governments have introduced all the legal rules about extortionate credit bargains, truth in lending, unfair contract terms and the financial services legislation of 1986. Free competition—it is favoured, I believe, by all sides of the House—which is so desirable to enhance efficiency for the good of all, can have the downside of causing a lowering of standards, as even the more reputable firms are tempted to reduce standards of quality and behaviour to their customers in order to cope with competition and to survive. Different governments have said many times in the past 30, 40 or 50 years that laws are needed in order to back up responsible standards of decent business morality.
If creditors normally have to go to court to obtain the benefit of the new statutory rights which the Bill proposes to introduce in order to claim interest on late payment of debts, the Bill will not have achieved a great deal. I agree with the noble Earl, Lord Home, who spoke from the Opposition Front Bench, that giving a small business a statutory right will not necessarily make it keen to challenge the people who owe it money any more than it is keen to do so now. The Bill will not have achieved much, therefore, if the person has to go to court in order to claim his rights. But a number of powerful incentives within and without the Bill help.
One powerful incentive for debtors to comply without being taken to court is referred to in the consultative paper at paragraph 3.5.2. Credit rating agencies are likely to,review their ratings of debtors who fail to pay interest".Further incentives are provided by the useful scheme which has been organised by the Federation of Small Businesses to publish league tables showing the average payment times of public companies. I commend Clause 13 of the Bill, whereby the statutory right to interest extends to debts that are assigned to someone else, like a debt collector, who could make a business of bundling together a number of small debts, making it economically attractive to pursue the interest which one particular creditor might not think it worth while, or might be embarrassed, to pursue himself.
One of the many suggestions put to the Government in the course of the valuable consultation process was that chasing late payments should be a regulatory function. I do not think that the noble Lord, Lord Ezra, mentioned this but, like him, I am a vice-president of the Institute of Trading Standards Administration. In that context it rather naturally springs to mind that local authority trading standards officers could give information and advice and assist businesses to pursue claims to interest on the late payment of commercial debts.
Obviously, as the Minister said, legislation like this is not a panacea but, along with other matters that have been or will be encouraged by the Bill, it can change the culture.
Finally, I have a couple of detailed queries on the Bill. The first was referred to by the noble Earl, Lord Home, and the noble Lord, Lord Ezra. The European Commission is bringing forward a directive on the subject. The Government's July consultation paper envisaged that unlike its own proposals the EU 861 would propose a penal rate of interest on late payments. The Government stated that they did not support a penal rate because it would not be proportionate to the perceived wrong and might increase the likelihood of debtors challenging in court the right to interest; for example, by alleging that the goods or services supplied were defective or deficient. How do the Government intend to ensure that their proposals in the Bill are compatible with the EU proposals, which we have not finally seen? Are the provisions of Clause 5, especially the reference in Clause 5(2) to "deterring" the late payment of debts, drafted deliberately in a broad way so that penal—or, to put it another way, deterrent—rates of statutory interest could be introduced by statutory instrument under the wording of the Bill?
My second detailed question relates to Clause 2, in which certain contracts are excluded from the operation of the Bill, including conditional sale and hire purchase agreements. Since such contracts have the same ultimate purpose as contracts for the sale of goods, I should like to know why they are excluded. I realise that payments due under those types of contracts are due periodically, by week or month, but I see also from Clause 2 that a contract for the simple hire—not hire purchase—of goods is included in the operation of the Bill. Such payments, like hire purchase payments, are also due periodically. Will the Minister explain those distinctions?
Finally, I wish the Bill a successful and speedy passage through the House.
§ 4.21 p.m.
§ Lord Sainsbury of Turville
My Lords, I am delighted to have the opportunity of participating in the debate. When I became a Member of this House I was told that 1 should expect a friendly welcome but was also ominously warned only to speak in debates where I had some in-depth knowledge as there would always be world-class experts present.
In the short time I have been here I have already experienced with pleasure the courtesy and friendliness of the House and have heard enough of the debates to convince me of the risks of displaying my ignorance. With that experience, however, has dawned the awful realisation that my various areas of expertise, such as the financial appraisal of supermarket sites, the aerodynamics of shopping trolleys, and how to tell whether an avocado pear is ripe, are not subjects as widely debated by your Lordships as I had hoped.
I have therefore hesitated to embark upon my maiden speech. I think, however, that I can claim some knowledge about the corporate payment of bills, having been for 17 years finance director, and now the chairman, of a company which processes around 85,000 invoices a week and which has some 3,000 suppliers worldwide.
We believe that to achieve high levels of innovation and quality we need to have long-term relationships with our suppliers which are built on trust. We are proud of the fact that one of our current suppliers started supplying us with meat and poultry in 1898, another started supplying us with tea in 1903, and a third started 862 supplying us with Stilton in 1914. However, such productive long-term relationships can flourish only if the energies of the participants are not wasted in constantly arguing about the late payment of bills. It is not possible today to have an efficient logistics system or rapid product development if trust does not exist between a company and its suppliers. I was brought up in business by my noble uncle, Lord Sainsbury of Drury Lane, to believe that what is right often makes good commercial sense, and the payment of bills on time is a good example.
I have a second reason for wishing to speak in the debate. While the subject may appear boring to some people, for many businesses, particularly small ones, being able to rely on an assured cash flow may be the difference between survival and bankruptcy. Too many small businesses rely heavily on trade debt for their working capital, with the result that the failure of one company can have a domino effect and lead to a chain of bankruptcies. As well as increasing the level of risk for business, the late payment of hills is also a major source of waste. Time and manpower have to he allocated to chasing up debtors, none of which adds to the value of the product or service in the marketplace.
In Britain the problem is especially severe because late payment seems unfortunately to have become an ingrained practice. A recent Bank of England survey showed that in the fourth quarter of 1996, less than 25 per cent. of businesses in the United Kingdom paid their bills promptly, and nearly 50 per cent. paid their bills more than 15 days late.
I do not think anyone could disagree with the basic principle of the Bill. Time is money and companies should be required to pay their bills when they say they will. There is, of course, room for debate as to whether a Bill such as this is the solution to dealing with late payment. In the past there has been considerable argument among organisations representing small businesses as to the merits of such legislation, although I believe the Bill now enjoys a wide measure of support across the business community, including that of the CBI, the Institute of Directors, and the Federation of Small Businesses. There have been two areas of concern. First, there are those who believe that the legislation will not be used by small companies because they fear that their more powerful customers will take their business elsewhere. Secondly, there are those who are concerned that stronger customers will invalidate the legislation by insisting on longer credit periods so that there is no danger of them paying interest.
I do not think that too much weight should be given to those arguments, and I believe that the Bill will be effective. I have two reasons for holding that view. First, in all other countries in the European Union, other than Ireland and Luxembourg, such legislation exists and is widely used. The statistics relating to the late payment of bills, as the noble Earl said, are not clear-cut, but if we look at late payment as opposed to payment terms, they support the Bill. In terms of payments overdue, the Nordic countries have the best record and also the highest proportion of businesses which charge interest on late payments. I do not believe that that is just coincidence. While I do not think that it is as easy as 863 many people believe to copy the industrial legislation and institutions of other countries, in this case the evidence is compelling. And if large companies do formally lengthen their credit periods, that will quickly become clear to other businesses, and no doubt their suppliers will then charge them prices which reflect that fact.
Secondly, while there will always be cases where mistakes are made and invoices disputed, what this Bill seeks to address is the intentional, systematic abuse of an agreement entered into in good faith. A European survey recently asked respondents about the major causes of late payments. In the UK, 51 per cent. of businesses cited intentional late payment as the primary cause. It was one of the highest figures in Europe.
Action is clearly needed. In the circumstances, to talk of this Bill being premature is rather like criticising a tortoise for sprinting. But, as has been remarked, we should not think that by passing the Bill the situation will be transformed overnight. Further measures will be needed. What we are seeking to do is to change a business culture, and that can be a slow and difficult process.
Britain's best companies are among the finest in the world, and we have strong positions in some of the growth industries of the future such as biotechnology, financial services and educational software. The success of those businesses will depend on the enterprise, vision and skills of management. Government cannot provide a substitute for that. But it can provide a competitive and supportive environment for innovative businesses. It can create the framework within which businesses, whether large or small, can compete effectively in today's global market-place. That is the business of government, and this Bill is a small but critically important step in providing just such an environment for British industry.
§ 4.29 p.m.
§ Lord Alexander of Weedon
My Lords, it is a very great pleasure on behalf of the whole House to congratulate the noble Lord, Lord Sainsbury of Turville, on a most excellent maiden speech which bore the characteristics of modesty. humour, expertise and common sense. It is also a great personal pleasure for me to do so because I have the highest regard and liking for the noble Lord, sharing, as we do, a passionate devotion to the work of the Royal Shakespeare Company and all that is needed to secure the further strengthening and development of that great institution.
As the noble Lord reminded us briefly during the course of his speech, the company he serves bears a great name and has a great history. But in part that reputation is maintained and enhanced because of the financial management and expertise that the noble Lord brings to the company, together with his tremendous integrity which is a beacon to all those of us who seek to work in business and industry. If I add that the noble Lord, like so many members of his notable family, has a reputation for great philanthropy and benefactions, then I am sure we are all aware of the great good fortune 864 we have that he is among us. We look forward to all his speeches on all issues that come before the House, even European directives as to the quality of avocado pears.
The inability to recover interest on debt which is paid late has long been a total anomaly in our law. When I practised at the Bar, it was sometimes necessary to advise clients that the only way in which they could recover a debt with interest was to engage in the contentious activity of issuing a writ. If the debt was paid before the writ was issued, then no interest was payable. I was asked, not unnaturally, from time to time by clients what was the logic of that and the answer had to be short and somewhat apologetic. There was none.
As the Minister pointed out, the House of Lords in its judicial capacity recognised more than a century ago that this injustice cried out for reform. So this really is not a case in which it can be suggested that law reform is either over-hasty or ill-conceived.
I became even more conscious of the damage done by late payment of debt when I started to work for NatWest. We act as bankers to almost 30 per cent. of companies in this country. I am proud that we are widely regarded as the leading bank for small and medium-sized companies. I have consistently and all too regularly learnt of the havoc which the virus of late payment of debt causes many medium-sized and small businesses. This was particularly acute through the last recession. Where debts are paid late, it is extremely difficult for a business to plan its budget and in particular its cash flow. In turn, this makes it harder for banks to respond intelligently to financial requests based on the cash flow projections of smaller companies.
The concerns of many businesses over late payment have long been well known. They have been effectively expressed by Stan Mendham, of the Forum of Private Business, to whose articulacy and energy in mounting the case for interest on debt paid late I am glad to pay tribute.
Our own research has consistently highlighted the problems caused by late payment. The regular research of the Small Business Research Trust which we sponsor asked respondents to list the most important of 14 problems facing their businesses. In the latest survey, 1 1 per cent. cited cash flow/payment/debtors as their most significant problem. Perhaps even more significantly, in the 32 surveys carried out since research started some eight years ago. the issue of late payment of debt has appeared every single time as one of the three largest problems.
I well know that the last government were conscious of the problem and I compliment them on their actions in seeking to encourage measures which would lead to voluntary action reducing late payment. The CBI also introduced a payment code. All that was positive because, as the noble Lord, Lord Ezra, said, the law cannot be a panacea in this area. Understandably, perhaps, the last government sought to minimise the intervention of the law in the commercial world. But long experience has shown that this is an area where there now needs to be a legal framework to change the culture. Like the noble Lord, Lord Bone, I do not envisage a large number of actions for recovery of interest clogging up the courts on a daily basis.
865 The purpose of legislation is often to change the culture and to create a climate in which attitudes are changed. We can all think of examples of legislation of that kind, whether it be equal opportunities legislation or statutory protection against unfair contract terms. I believe that this legislation will contribute to a marked change in behaviour. It is worth recognising that its impact will be limited so far as small businesses are concerned. As I understand it, the legislation will only apply as between business and business and will not apply to supplies or services rendered by small businesses to consumers.
The supposed difficulties in the way of this legislation have been canvassed from time to time. It has been said that it will be ineffective because dominant purchasers would respond by extending the credit period. I personally doubt whether this would be widespread, but if large purchasers adopted that cynical tactic, then no doubt adverse publicity would quickly flow and at least the supplier would know where it stood.
It is also said sometimes that the obligation to settle bills promptly will place a burden on small businesses themselves when in difficulty. But how can the difficulty of one business become an appropriate reason why it should unilaterally have the freedom to put another business which has fulfilled its side of the bargain into difficulties?
I know that the detail of the Bill will be scrutinised with care. It is clearly important that there must be a means of taking account of invoices which are legitimately unpaid because they are incorrect or the goods or services are inadequate. I also personally doubt whether it is desirable to have a limitation period as long as six years. I should have thought that creditors should be required to let their debtors know that they are claiming interest long before that period. In a statute designed to secure prompt payment, it surely seems reasonable to expect fairly prompt action by the creditor.
My noble friend Lord Home, in his thoughtful and constructive response to the Minister, raised the question of the invoice which was not sent promptly or not sent at all. The consultation paper says:It would be unreasonable for a business to charge interest on a late payment if it had not provided the debtor with the information necessary to make prompt payment".There is a provision in Clause 6 which permits the remission of statutory interest but it is very general in terms. I would welcome the Minister's assurance that it is designed to cover situations where a bill is not sent accurately or promptly or where the goods are defective or there is some other valid reason for non-payment. At present, the clause is a charter for litigation because of the width and uncertainty of the terms in which it is drafted.
I echo the hope that there will be harmony between the statute and the directive which the European Commission intends to issue. This is clearly a concern to many of us here today. I should be glad if the Minister would explain why he is confident that harmony and compatibility between the two will exist.
866 In summary, I see this as a simple, highly desirable. overdue Bill which should be of particular value to the small businesses which play a vital and increasingly important part in our economy. I am also conscious of the precedents which we as citizens have to bear. If we are late in paying our taxes we have to pay interest to the revenue in overdue tax. I see irresistibly the same, perhaps even more, basic fairness in ensuring that the contractual debts from one business to another carry an appropriate rate of interest.
I sit down with the greater pleasure because I look forward keenly, as do all noble Lords, to hearing the maiden speech of the noble Lord, Lord Stone of Blackheath.
§ 4.40 p.m.
§ Lord Stone of Blackheath
My Lords, 1 too rise with some nervousness to address such a wise gathering. But I take courage on two counts; first, because since my introduction I have been warmly welcomed by your Lordships from all sides of the House. You have given me advice and encouragement and offered me immediate warm friendship, for which I thank you. Secondly, I am emboldened because what I intend to say today is not based on any presumed knowledge of affairs of state, but from 40 years of experience as a retailer—I hope your Lordships are wondering. "How can he have been retailing for 40 years and look so young?"!
On the street markets of South Wales, when I was in my early teens, my late father, Sydney Stone, taught me how to trade. His philosophy was different from the majority of stallholders. He used to say: "To ensure your business survives, be kind to those who work for you; give value to your customers; and deal honourably with your suppliers of goods". When I subsequently joined Marks & Spencer, a global retailer where I have now spent over 30 years, I was pleased to discover that it too was founded on those same principles—on the formation of close, trusting, long-lasting, co-operative relationships with all of the companies with which we deal.
I mention to you my father's small business and my current employer, a large firm, by way of declaring my interest in the Bill. And if I repeat some of what has been said, it is because I feel that I should cite long experience in a transactional business. What I have found throughout my working life is that everyone benefits when two or more parties respect one another, do business with a trust and mutual understanding and accept each other's point of view. I am not so naive as to believe that to be complete altruism, but neither is it true that business has to be a battleground between winners and losers. It may be called enlightened self-interest, but we do care for our partners, and we have proved that that approach works.
In itself perhaps this Bill may not bring about prompt payment from the large to the small in every case. Government can create a legal framework within which business can improve commercial relations, but one must leave it to the companies themselves to realise that acting in good faith leads to increased business and 867 greater efficiency. Our company has practised partnership policies successfully for decades. We realised that it would be in our interests if those who supplied us were paid on the button, and in full, so that their cash flows would be healthy.
What we found as a result was that our suppliers worked hard to make our business thrive so that our lucrative business with them could grow. Eighty per cent. of our £5 billion clothing and homeware comes from 20 such suppliers. Nearly all of them have been with us for 25 years, over half for 40 years and we have traded with one, Dewhirst, for over 100 years. Today, whether our supplier is a major combine or a small firm in Dorset with only three permanent staff growing blueberries for us, we try to pay on time. That is the philosophy but yes, sometimes principles are not turned into practice. Despite our good intentions, we know from experience how easy it is for an invoice to get lost in the system.
The phasing-in of the Bill should provide an opportunity for large organisations to review their bureaucracy and ensure their systems work well. Scourging bureaucracy will not only eliminate their inefficiencies but it will be a God-send to their more vulnerable small specialist suppliers. Most innovative and entrepreneurial, fledgling British businesses manage their cash and credit on a knife edge.
I hope that the Bill does not lead some big firms to lengthen the payment terms in the contract or to try to exact a high discount for rapid payment. The prosperity of our small businesses is essential to our economy, and large businesses, banks and governments must each play a part in their development. I am pleased the Government recognise that.
Business Links and their equivalent in Scotland. Wales and Northern Ireland are being encouraged to support small firms and to help them have proper credit management. I am told that the DTI has produced a guide to cashflow management with the Institute of Credit Management, soon to be available on the Internet. And yes, another important area supported by the Government is the British Standard for Prompt Payment, BS7890. which was developed with the CBI.
This issue is not just confined to business. For an integrated, cohesive society we must extend partnerships out of commerce and into the creative arts and sciences, where small companies have big cash-flow problems. I have been involved in the arts in recent years, particularly small arts organisations. Yes, mainly they want us Lo raise funds. But it is crucial for them to know how to find cash within their current income and expenditure. For that they need help in the form of management resources to produce business plans and financial strategies.
Let me give two examples from last autumn. A contemporary dance company with which I was involved—AMP—had a brilliant choreographer, talented performers and experienced technicians, but was in mortal danger with a deficit of £360,000. Some generous angels lent it some cash and, with financial management help, it is now virtually self-sufficient. In 868 my home village of Blackheath, a 100 year-old beautiful concert hall almost went to the wall. It was nearly torn down for the sake of a £50,000 deficit. It was owed money but could not collect it. It survived with a promised lottery grant and some local friends and professional cash management.
Not only are small arts organisations vulnerable: what about this country's record of failing to give help to our scientists and inventors? As a governor of the Weizmann Institute of Science in Israel, I know that a growing portion of the funding for this fine research institute comes from its subsidiary, YEDA, in which businessmen help scientists to start up new business ventures. None of those flounders for lack of innovation; if they die, it is from lack of cash. Our own British scientific and artistic start-ups today are the source of our future income.
In America, small businesses with fewer than 100 people create two out of every three new jobs. Last year over a third of its venture capital investments went to start up new enterprises. In Europe less than one in eight succeed. One of the major reasons is the ease of access to cash in the USA for entrepreneurs. Our banking system is more risk averse. We are not America, but we can be less confrontational and co-operate by paying promptly.
Laws on paying on time go back much further than merely 1893. The Jewish Association for Business Ethics, with which I am involved, relates the code of ethics taught in biblical writing of our faith to current business practices. Paying your labourers or your suppliers late has always been seen as theft of the worst kind—robbing those dependent upon you. In Leviticus it says:Thou shalt not defraud thy neighbour, neither rob him: the wages of him that is hired shall not abide with thee all night until the morning".It will give me much pleasure also to cite one of four of our past chairmen to be welcomed by this House, the noble Lord, Lord Sieff of Brimpton, Marcus Sieff, who unfortunately is too ill to be here today. As the House knows, he is a man who has made many friends and has been successful at bringing together many partnerships in business, even across national borders in the Middle East to help peace. He has been a guide and mentor to me. In 1980, when I was his personal assistant, in his maiden speech he said:The creation of wealth for all to share demands a high working performance of everyone and needs co-operation, not confrontation … Conflict solves nothing and benefits nobody".—[Official Report, 4/6/80: col. 1443.]We have even found it good to develop friendly relationships with our competitors. If I may say so. the long-standing warm relationship between the Sainsbury family and ourselves has been a source of much pleasure. We have co-operated in many of the interests I have referred to today. As your Lordships can see, we think alike. Forgive me if my remarks have wandered too widely. My purpose was to cite examples from personal experience where, in practice, increased prosperity has come from unselfish consideration of the needs of those who are vital to the success of your business. If you act with altruism pragmatically to help 869 your partners, in most cases ultimately it turns out that you and your company have practised enlightened self-interest. Remember every debtor is at some time a creditor. If we pay up promptly and get paid on time each of us and the whole economy will benefit.
As has been said, this Bill is not just about redressing a balance between the mighty global corporation and the defenceless small trader; it is an important element in a package of measures designed to change a culture and promote a better way of doing business.
§ 4.49 p.m.
§ The Earl of Kintore
My Lords, the privilege of congratulating the noble Lord, Lord Stone of Blackheath, on his maiden speech falls to me. I am sure that I speak for the whole House in saying that he gave us a most excellent and informative speech. The noble Lord obviously used the Christmas Recess to good effect. I have the crib so I know how old he is. He must have started his working life very young. As a managing director of Marks and Spencer, he will have a wealth of knowledge on business matters. I hope that he will be able to take part in the further stages of this Bill. It is so good to know that Marks and Spencer supports the prompt payment culture.
I thank the noble Lord, Lord Clinton-Davis, for introducing the Second Reading of the Bill. I take part as a fellow elect for a small business fellowship under the auspices of the Industry and Parliament Trust. Over the past 35 years I have been involved with a number of small service businesses, all of which have had to work on credit, not being paid until the particular service had been carried out. As small businesses we suffered late payment, which is a bad business practice. Particularly bad was payment of premiums when I was an insurance broker. The great game used to be to keep the broker waiting as long as possible despite our credit terms clearly shown on invoices. But we were well aware that other brokers could provide the same cover at the same premium, and if we pressed too hard we would undoubtedly lose the business at the next renewal date. Sometimes one had to wait until the client had a claim before he would pay the premium. The customer is always right; and if not right then is stronger than his service provider. Unless the service is unique and cannot be found elsewhere, I doubt that small service providers would ever dare threaten their customers with statutory interest for fear of losing their business.
I heard a story at the weekend about a company which gives a small taxi firm about 70 per cent. of its business but seemed only to pay twice a year, after the managing director used the service. The conversation apparently goes like this. Managing director: "Have we paid your bill recently, John?" Taxi owner: "No, sir". A rocket goes to the accounts department and the bill is paid, but it really is not good business practice.
My small farming partnership and estate cottages enterprise tries to pay valid invoices within 30 days. We usually succeed, as indeed do organisations which owe us money. But I am afraid I must report that a government department owes me money. I declare a possible interest in this Bill. The money is owed by 870 the Department of Agriculture for Scotland, being its contribution of £375 to me, a successful entrant to its excellent countryside premium scheme which seeks to preserve and enhance the environment by moving my farming activities back from a river bank and a water course. I note I paid the Grampian Farming and Wildlife Advisory Group on 3rd October 1997 and sent its receipted invoice to a named individual at the department shortly after that. I admit that the department did not actually say when it would pay and I suppose in my innocence I expected 30 days. But it is now 60 days overdue despite two chasers. The Minister may say that this is a statutory function made in course of government and not a commercial debt and so outwith the scope of the Bill. Maybe so, but it is a commercial debt as far as I am concerned as it will reduce an amount I have paid from a commercial account. Wherever it falls, it has been outstanding for far too long.
If central government departments and agencies, public limited companies and their large private subsidiaries pay their bills on time, this will be helpful and set a good example. We may get to the situation which exists in Sweden where accounts are paid between six and 10 days late as opposed to our dismal average of 23 days after the 30-day period. But small business is not entirely blameless. Credit management is either non-existent or shambolic. I welcome the Department of Trade and Industry's scheme to assist small firms in better credit management and the development of a modular national vocational qualification in credit management. I should probably declare an interest as president of the Institute of Certified Book-Keepers, an examining and standards setting body with 26,000 students and members. When the Bill becomes law we shall have to amend part of the syllabus of the intermediate exam dealing with credit management, and probably rewrite module seven—credit control—in our diploma in small business management.
In a small business it will be the book-keeper who will be the credit controller, ensuring that the business pays its bills on time, like PAYE and VAT, to departments that are not renowned for allowing much credit, and also ensuring that the business is paid money owed to it. I think the worst case I can remember was an account sent to me 13 months after goods had been supplied. But tradesmen regularly seem to render their accounts some months after they have carried out work. These accounts also seem to be on the high side and one wonders whether a percentage is added for late payment which has nothing to do with my reluctance to pay but everything to do with the tradesman's incompetence in getting his bills out. Accounts should be well laid out, show what service was carried out and when, and show clearly when due for payment. If an account becomes overdue, chase it immediately. Be pleasant but assertive. If an account is disputed, deal with the objection swiftly and ask for payment of the undisputed part immediately and the rest immediately the dispute is settled.
If government departments and big firms can improve their payment performance and small firms their credit management, there should be no need for recourse to statutory interest. But if the right is there, small 871 businesses will be ill-advised not to pursue outstanding payments in the belief that they are earning interest on the debt. The debtor may have no intention of paying the debt at all.
§ 4.58 p.m.
§ Lord Graham of Edmonton
My Lords, I rise with some trepidation. Having sat in the other place for a number of years, I lay claim to the fact that we are taking part in a debate which by comparison with those which occur in another place stands out. We have here people who speak from a lifetime's experience and who are certainly at the sharp end of the topic they are talking about. We have had a feast of expertise and humility from those of the business community who have spoken today. The two retailers, the noble Lords, Lord Sainsbury and Lord Stone, have told us frankly how they conduct their businesses. If all other businesses were conducted in the same spirit of fairness and justice, the problem we are debating would not exist at all. The noble Lord, Lord Alexander of Weedon, also brought to the debate his undoubted breadth of experience in dealing with problems. I particularly enjoyed the contribution of the noble Lord, Lord Ezra, who at one time was the manager of a very big business which then declined into a very small business. I refer to the National Coal Board, which later became British Coal. What we have had today is a feast of experience which I venture to suggest cannot be found in any other forum.
In rising to speak in the debate I declare some interests. None of them is directly financial but all are declared in part 3 of the register. The first interest I declare is that I speak with the support of the Co-operative movement. That movement has in it big and small businesses. The Co-operative Wholesale Society is a big business and has more than 18,000 employees. But within its network there are small societies such as the Allendale Society, which has 10 employees. There are gradations. The point I am making is that this Bill is not for big or small businesses but to provide equity and justice. It has been said more than once that it is intended to try to change the culture which apparently exists in this field.
I also declare an interest of a non-financial nature in raising the problems and concerns of small builders and their trade association. I see the noble Lord, Lord Strathclyde, nodding. He and I attended one of its presentations some years ago when he was a Minister in the department. Regardless of what has been said about the concerns, whenever I listen to the representatives of small businesses, at the top of the list of their worries, besides the current political topic, is their concern at not being paid on time.
I do not make a political point and in my view this is not a political debate. The noble Earl, Lord Home, made an excellent speech. But he left me with the impression that he was far too defensive about the previous government's record. I and the House understand the problems. Over the 20 years or more that I have been in this House this problem has always existed. The solution that the Government have brought forward may not be the right one; it may need to be trimmed and altered as 872 we go along. Nevertheless, I believe that this proposed legislation responds fairly to a situation that should be tackled differently in the future.
A recent survey suggests that only one in 10 big British employers pay on time within an agreed contractual payment period. The Forum of Private Business reckons that at any one time private business within the United Kingdom is owed £20 million in late payments, a statistic referred to by the noble Earl, Lord Home. If that is the situation, and businesses are being denied by their suppliers, one needs to look at the solutions. The noble Earl said that we should be worried about those who deliberately withhold payment. It has yet to be quantified how many of those, as a policy, deliberately withhold payment. The former Deputy Prime Minister said that part of the way he conducted business was by delaying payment for as long as possible. That is not a very good example to the country or the business community.
Small businesses have been placed at a great disadvantage because, as has been said by more than one speaker, there is the fear that if they become too aggressive in demanding their rights they may very well lose the business on which they depend. I am not as sanguine as some who believe that this is not a real problem. It is, but it is one that can be put right. I notice that the Minister said in introducing this Bill that to exercise that right is voluntary; that it is not an automatic, statutory right, but it should be brought into being. It is a weapon to be used by those who feel they have been disadvantaged.
I am well aware that the move will not be welcomed because some people will argue that the Government are meddling in the business community. To the extent to which they may be at the margin with a further, tiny involvement, then so be it. The advantages of saving thousands of small businesses from bankruptcy make that a small criticism, to be borne with equanimity.
As regards late payment, I believe that it is a canker which can fester, and big businesses, most of which I categorise as honourable, will be the losers. As the noble Lords, Lord Stone and Lord Sainsbury, said, big businesses are not dependent on one supplier but on thousands of suppliers. They would not maintain a relationship for very long if they had a bad reputation as a receiver of such services by treating those they relied on in a bad way.
I believe that there are many spheres of activity that will benefit from these provisions. The Federation of Master Builders tells me that it,is emphatic that more needs to be done in legislative terms to curb unpaid debts which inherently prevail in the construction industry".If the Government and House are to listen to the views of those outside, I say to noble Lords that we ought to respect the views of those who are at the sharp end. The construction industry is difficult to manage, to guide and to organise. But the organised voice of the Federation of Master Builders tells us that that is its way.
I declare an interest as the honorary secretary of the All-Party Group for the Retail Trade. The British Retail Consortium, in a letter to the President of the Board of Trade, said that it, 873felt it would be unlikely that small businesses, dependent on custom from large firms, will charge interest for late payment because of the fear of losing trade".Is it not terrible that the nexus between small and large companies is an element of fear? It is not necessary for anyone here to spell that out because we can see the possibility. More than one noble Lord has said that this legislation may not be the answer. The noble Earl, Lord Home, said it will have very little effect on the margins. He may be right, but we shall see. But if the Government produce legislation for the business community which is to be used and not abused, that is a very good thing.
The basis of the Bill is quite clear. The statutory right to claim interest on late payments provides a stick. For the first time there will be a financial disincentive to settling bills long after they are due. The carrot, however, is the achievement of a fair payment culture over the long term. That must be good for large and small businesses and for those who do and those who do not pay on time. The House should welcome the Bill. I believe that the business community will be fair and equitable and recognise, whether one calls them black sheep, cowboys or anything else, that there are those in business who need to be reminded that business ought to be ethical and based on co-operation and give and take. The Government should be congratulated. I certainly support the Bill.
§ 5.8 p.m.
§ Lord Meston
My Lords, perhaps I may begin by joining in the congratulations to the galaxy of maiden speakers who have addressed us this afternoon, each one of whom made a contribution greatly enhancing this debate.
This legislation is long overdue. It is 20 years since the Law Commission completed its work on the topic and, with respect to the noble Earl, Lord Home, I suggest that "premature" is not an appropriate description for it. The need for legislation remains obvious in order to help traders with their problems of vital cash flow, particularly the relatively small trader dependent on one substantial customer.
In the years since the Law Commission reported, we have learnt more about the knock-on effects of late payment and the general ineffectiveness of voluntary initiatives, including those relied on by the previous government as a reason for not legislating in this area. The previous government blandly suggested that there was insufficient evidence of a problem or that late payment was putting companies and small businesses out of operation. My reply would have been to suggest that one spends any Wednesday morning in the companies court listening to the depressing catalogue of small companies meeting their fate by being wound up.
I agree with the noble Lord, Lord Graham of Edmonton. that the Bill gets the balance about right. Although government departments have tried to lead by example with prompt payment of undisputed debts, I suspect that British Standard 7890 has had little impact beyond the great and the good.
874 The noble Lord, Lord Alexander of Weedon, drew attention to an important limitation on the new remedy in the Bill in that each of the contracting parties must be,acting in the course of a business".That is a phrase found in other statutes which has generated case law in some marginal situations but which now seems to be reasonably well understood and is capable of covering the one-off transaction or the transaction out of the usual run of business for a particular trader.
The noble Lord, Lord Borne, drew attention to the excepted contracts in Clause 2(3). I would add to the question asked by the noble Lord by asking what is meant by,a contract intended to operate by way of … charge or other security",in sub-paragraph (c). Does that mean that a contract with any form of security is excepted, or does the phrase,intended to operate by way or,have some limiting effect?
If a statutory right to interest is to be part of the solution for late payments, it is important that the legislative scheme is essentially simple and consistent. The Bill tries to achieve both simplicity and consistency. Clause 4 states the day from which interest starts to run. However, Clause 4(2) enables the contracting parties to agree some other day. Concerns have been expressed that the dominant party will persuade smaller traders to agree to substantial extensions beyond the 30-day limit in the Bill. Clause 8 deals skilfully with the ability of the parties to exclude or vary the right to statutory interest, but I am not sure whether it would restrict the extension of the time for payment to, say, 60 days or 90 days.
The noble Lord, Lord Clinton-Davis, referred to the operation of Clause 8 on excessive credit periods. With respect, that does not tell us what is likely to fall foul of Clause 8 as an excessive credit period. Perhaps there is room for the introduction of a statutory presumption that a purported agreement to extend the 30 days by more than a further 30 days does not leave the supplier with a substantial remedy for late payment and therefore falls foul of Clause 8.
Several noble Lords have mentioned the problem of late or inaccurate invoicing. Clearly, there is a problem, particularly with unclear running account statements. The noble Lord, Lord Alexander, pointed to one solution in the remission provisions of Clause 6 in which the conduct of the supplier can lead to the remission of part, if not all, of the statutory interest. The word "conduct" is defined as including "any act or omission". I suggest that Clause 4 might provide a simpler solution because time does not run (even beyond the 30-day period) unless and until the purchaser has had notice of the amount of the debt.
As to the rate of interest, understandably the Bill does not say what is to be the rate of interest. It provides for the Secretary of State to set a rate, which one would expect to be a realistic rate linked to the base rate and to whatever the rate at which the banks are lending at the time, so that the suppliers of goods and services can 875 be compensated for what they have to borrow and so that purchasers are not tempted to delay payment because of any significant difference between what their banks may charge and the statutory rate. In that context, I share the anxiety to learn what is expected from the proposed European directive.
The word "penal" has been mentioned in that connection. That word has arbitrary overtones in English civil law. The noble Earl, Lord Home, referred to malicious non-payment or malicious default. Perhaps that is not a particularly helpful way of looking at things. The law, certainly in the equitable jurisdiction, already provides for what is called the "wilful default rate of interest". That rate of interest is above the rate normally provided by the court in order to ensure that no profit is made from a breach of an obligation. Perhaps rather than using the word "penal" (with its unfortunate overtones at least in English law), we should try to identify precisely what any rate of interest seeks to achieve in deterring the late payment of bills which have been properly rendered.
In this respect, I am concerned by the word "may" in Clause 5(2), which provides that the Secretary of State,may set the rate of statutory interest with a view to—(a) protecting suppliers whose financial position makes them particularly vulnerable if they are paid late;(b) deterring the late payment of qualifying debts".Surely the main purpose of setting the rate is to do exactly both those things and, in particular, to deter. Indeed, surely the word "may" should be "shall" or there should be some other form of emphasis in Clause 5(2) to indicate the basis upon which interest will be set.
Clause 5 also provides the alternative for the Secretary of State to set the rate by prescribing a formula. I do not understand why this may be necessary and I hope that it will not be the chosen way of dealing with the matter. Apparently straightforward interest calculations can cause confusion enough for some people, including mathematically challenged lawyers who sometimes have to formulate claims. Statutory formulae, even if not as complex as those used in the areas of money lending and consumer credit, will cause more confusion and dispute. I suggest that they should be avoided unless absolutely necessary.
Finally, on the question of setting the appropriate rate, I hope, again in the interests of simplicity and consistency, that there will be some definite correlation between the statutory rate and the rate normally provided for judgments, which has been only 8 per cent. since February 1993 and which, according to the recent consultation paper from the Lord Chancellor's Department, is not to be amended. Of course, it is to be hoped that the new provisions will deter litigation, but I suggest that it will be a little curious if the statutory rate is 8 per cent. above base rate while the judgment rate, once a judgment has been obtained, is only 8 per cent. Perhaps some consideration could be given to the convergence of the two rates.
In the context of that consultation by the Lord Chancellor's Department, rather than directly under this Bill, the other question to be addressed will be whether 876 the new statutory interest will affect the value of an action for the purpose of various jurisdictional and other limits in the county courts, including arbitration. Liquidated interest claims have an irritating habit of just tipping the claim from one financial limit to another, sending the lawyer off on an unsatisfactory hunt for the elusive answer to the question of whether that matters for the purposes of the particular limit concerned. That is part of the wider question, technical but important, of whether there is a separate right of action to interest as distinct from the principal debt. That has implications for the questions of assignment and limitation, to which the noble Lord, Lord Alexander of Weedon, referred.
As far as concerns Clause 15(2) and the phased introduction of the provisions of this Bill, the reasons for phasing and the proposed order of priorities were generally welcomed in the consultation exercise and there is perhaps no real basis for opposing the principle. However, I should prefer to see at least a definite overall time limit for full implementation to be stated on the face of the Bill so that there is no temptation to let matters drift. Likewise, the proposed two-year interval appears to be rather more generous than might have been hoped for, particularly if the 50-employee limit is used to define small businesses. That may be a source of difficulty for businesses with a fluctuating workforce that runs at about the 50-employee level.
I am sure that I am not alone in having received a helpful briefing paper from the Fair Payment Group. That body makes the point that phasing may be a source of considerable uncertainty, and that if phasing is applied it is vital that the subsequent phases are not conditional but are followed through automatically. It also suggests that accelerating the transitional period and reducing each phase to a year has the merit of decreasing the period during which businesses will face additional complexity in identifying which, if any, of their trading partners are subject to the provisions. A reduced period will also reduce the potential for unfair competition at the margin, which is a problem for all thresholds.
We welcome the Bill. Simple common sense suggests that its provisions have great potential for priming the economy, and we should not lose the opportunity to do our best to ensure that it works.
§ 5.21 p.m.
§ Lord Strathclyde
My Lords, on behalf of the Opposition I should also like to congratulate and welcome all the maiden speakers who have spoken in the debate this afternoon. It has been extremely useful to have this debate and to hear noble Lords. It was also particularly surprising to hear so many noble Lords speak on the subject of their interest, which was mainly supermarkets. The noble Lords, Lord Graham, Lord Sainsbury and Lord Stone, referred to their supermarket interests. At one moment I thought that the Labour Party was harbouring a cartel. However, I observed that the noble Lord, Lord Borne, was in his place. He would ensure that none of that went on on the Back Benches.
877 I am sorry to strike a rather discordant note in this afternoon's deliberations. This is a Bill whose aims I applaud but whose reasons for existence I do not. I wish that we did not have to deal with this Bill. I begin with a quotation:In the end, it is you and you alone who will determine whether or not your business thrives and whether our economy becomes more competitive and our country more prosperous".That is a good quote and few of us would disagree with it. It is the kind of quote that I could have made myself, and probably have done in the past. The surprise is not that it is not one of mine but that it comes from the Parliamentary Under-Secretary of State for Small Firms, Trade and Industry, Barbara Roche. How strange, therefore, that soon after the publication of the extremely good document about the development of business links this Bill should come along, which is regulatory, bureaucratic, difficult to understand and takes away from businesses the ability to make decisions to enhance their own competitiveness.
The Government have decided that this is the best way forward. This Bill is a spin-doctor's dream. Take a perceived problem which has a certain amount of popular appeal and then provide a legislative solution which is the answer to all our prayers. So far so good, until one has to put it into practice and produce a Bill to deal with it. I believe that far from resolving the problems faced by small businesses the Bill will add to many of their difficulties. Think how many small firms do not employ 40 or 50 people but under five or which are small traders who often have to send out their own bills or ask their wives or husbands to do so. The extra worry now is whether they will be breaking the conditions of the Bill or whether they have inadvertently failed to agree to charge interest when they should have done so. If they decide to do so, what is the correct rate? How do they find out about it and how do they apply it? Those are the real problems which this Bill raises.
We are equally opposed to the late payment of debt. The noble Lord, Lord Graham of Edmonton, referred to fairness and justice. I agree with him, as does the Conservative Party. That was demonstrated over the past 18 years when we were in government. But there is no obvious solution to the problem of the late payment of debts. That is why it has taken some 165 years, as the noble Lord, Lord Clinton-Davis, reminded us, since the earliest development of discussions and law in this area. If it was such a good idea to bring in a piece of legislation like this it would have happened a long time ago. Rather like reform of your Lordships' House, if it was so easy to do it would have been done long before now.
I also agree with the ethical question to which the noble Lord, Lord Clinton-Davis, referred. A late payment is a bad thing and should be discouraged, but there are other ways to tackle the problem, to which I shall turn in a moment. There is no evidence that legislation will work. Indeed, there is substantial evidence internationally that legislation makes the problem worse because it extends the overall amount of time taken before bills are paid. Further, there is no evidence that there is a real need for the legislation. After all, there is no difference of opinion between us 878 that businesses are currently extremely successful, that the economy is booming and that people are making money and improving their margins and the quality of their businesses. Where does this Bill come from, bar the need to put something easy and presentable into the election manifesto?
There are many people in industry, particularly the small business sector, who support the need for a late payment of debt. Like my noble friend Lord Alexander of Weedon, I salute the work done by Stan Mendham. For a long time Stan Mendham was a lone voice in small firms interest groups calling for this kind of measure. I do not believe that legislation is the solution and this Bill is perhaps the worst of all possible options. The Bill is bureaucratic, complicated and discriminatory and the law of unintended effects will apply. It is bureaucratic because smaller firms will not wish to do the work that this Bill implies. It is complicated because many firms will not understand its provisions and how to make the provisions work well. It is discriminatory because of the differences that will now apply in law between small firms and big firms. The noble Lord, Lord Ezra, said that just because a business employed 49 people it did not mean that it was necessarily a small firm or that if it employed 51 people it meant that it was a large firm. There are plenty of examples of very small firms with substantial turnover which no one would regard as very small firms and firms which employ 100 or 200 people and are highly work intensive but have all the hallmarks of smaller firms. That definition will give the Government a great deal of trouble. Why have the Government not put this definition on the face of the Bill? When will we see the amendment that brings it into the Bill? If there is to be a fundamental difference of treatment between large and small firms we should see it spelt out in legislation.
What about the law of unintended effects? All the evidence from overseas that I have seen shows that by introducing legislation one increases the amount of time taken by people to pay their bills. They increase the credit terms, but pay their bills more on time. That does nothing to improve cash flow, but it does a great deal to improve the figures cosmetically.
The noble Earl, Lord Kintore, made the point about cyclical businesses which receive their incomes at odd times of the year or rarely during the course of the year. Such businesses include agriculture and other rural industries which may rely on harvests. How will they be affected? What provisions are there in the Bill to protect such industries? There are many other industries such as transport and others affected by chains of contractors and subcontractors, most notably the construction industry mentioned by the noble Lord, Lord Graham of Edmonton.
Far be it from me to remind the Minister about the situation in the law. I understand that banisters wait a long time before they are paid. Will the Bill apply to them? Will they oblige their solicitors to pay them on time? I should also like to ask about those who object to charging interest on moral, religious, or conscience grounds. Will there be any exclusion in the Bill for them?
879 Much has been said about statistics. Many studies have been made over the years. The Minister mentioned some of them. Of course he mentioned only those which favoured his case. There was no mention of the studies done by Grant Thornton, or Intrum Justitia of Amsterdam looking at the international question. Those studies are confusing and contradictory.
I could not resist smiling when the Minister reminded us of the words of the first competitiveness White Paper since I was the Minister who talked Michael Heseltine, who was then President of the Board of Trade, into ensuring that there was no commitment to a legislative right to payment of commercial debt, not that he needed a great deal of convincing, because he could see, as I could, that many of the cosmetic attractions of a statutory right to interest did not stand up to much scrutiny.
When I was in the DTI, I spent a great deal of time travelling around the country talking to small firms. I agree with those who said that one of their first concerns was the late payment of debt. However, in relation to some of the problems caused by a statutory right to interest, they were among the first to say that there may be different ways to deal with the problem rather than the legislative solution. The Government have made a classic mistake. They have looked at the first solution offered to them and accepted it hook, line and sinker.
I greatly regret that there has been no appraisal of the alternatives; for example, to encourage the use of the codes of good practice. Perhaps the Minister will tell us how well that works in government departments. If he has the figures, will he tell us what is the record of, say, the MoD in paying its bills on time? If he does not have that information perhaps he will be kind enough to write to me.
What about quicker justice? The noble and learned Lord, Lord Woolf, wrote a report on that subject not long ago which was broadly accepted by the then Lord Chancellor, my noble and learned friend Lord Mackay of Clashfern. He did not have time to put the recommendations into effect. Have the Government looked seriously at improving the whole basis of small claims and speeding up payment of debt'? Do they agree that that is a far better way to go than to produce a Bill such as this? The real problem, as I have discovered from my research, is created, first, by a lack of proper credit controls and, secondly, by the difficulties caused by the recession of the early 1990s.
On the subject of credit control, for companies that have improved their ability to send out invoices and chase them up, the late payment of debt has diminished substantially. I believe that the Minister will agree with me that, with the growth of organisations such as Business Links which give proper advice and training to firms, the problem has decreased substantially over the past few years.
The problems caused by recessions are obvious. During 1990 to 1992 late payment of debt became a real problem. It was also a matter of survival for many firms. Does the Minister believe that this proposed legislation 880 will have any effect on that? Like the banks, many firms learnt a great deal from the experience of the recession. I greatly hope that none of those problems will recur.
Many noble Lords mentioned the difficulties which will now be associated with the European directive. Will the Minister tell us why it is that while we have the presidency of the Council for six months we are introducing this Bill? Should we not be using our time in the Council of Ministers to promote the idea—if that is what is required—of a European directive, and to make the touch as light as possible?
Finally, I hope that the Minister will take note of the drafting points made by his noble friend Lord Borrie and my noble friend Lord Alexander of Weedon. Sadly, the Bill shows all the worst aspects of the Government. It is a Bill about presentation and expectation. It will provide nothing. I doubt whether it will be a force for good. The Government will regret this measure. Unfortunately, ultimately it will be the small firms themselves which will pick up the bill. We shall play a full part in Committee. I hope that the Minister will be able to respond positively to the suggestions for improvement that have been made during the debate.
§ 5.38 p.m.
§ Lord Clinton-Davis
My Lords, I agree with at least one thing that the noble Lord, Lord Strathclyde, said: his commendation of the maiden speeches that we have heard today. They were welcome to the House, and I shall come to them later. I agreed with virtually nothing else that he said. He was out of tune with many of his own colleagues, the mood of the House, the responses to the consultation document, and, characteristically, generally out of tune. I always like his excess of charm and talent so that whenever he sees the top he can never refrain from going over it. That he undoubtedly accomplished today in his forthright condemnation of this measure.
We now of course know that the noble Lord was the miscreant in the government who persuaded Mr. Michael Heseltine, when he was President of the Board of Trade, not to embark on this, although in the light of some of the comments that have been made in the debate about the statements made by Mr. Michael Heseltine, as someone who had engaged in business, when commending late payment, I do not think that he needed much persuasion. Therefore, if this is a triumph for the noble Lord, so be it; let him bask in it.
There is overwhelming evidence as to why the plight of small and medium-sized enterprises in particular needs to be met. I do not dissent from the fact that there are some anxieties about the Bill. I hope that, together with those who support its principles, we shall be able to work towards improving it. That is the purpose of consideration of the Bill in this place in Committee and at later stages.
However, I wish to point out one aspect at the outset; the Bill does not impose any mandatory obligations. It offers a tool, an instrument, which is available to small and medium-sized enterprises. I listened with great care to the speech of the noble Earl, Lord Home, and 881 I commend him for a good speech. but he made that cardinal error. This Bill does not impose an obligation on anyone to claim interest, and that is clear.
I turn to the maiden speeches and to some of the comments which were made by my noble friends. I listened with great interest to the assertion of my noble friend Lord Sainsbury that he was not unused to dealing with eccentric issues in his business; for instance, the ripeness of avocado pears. He will not be disappointed to learn that from time to time eccentric issues are raised in this place. For example. in due course we may debate the importance of grandparents and beg to move for Papers. If that ever comes to pass, it is likely to receive attention at least from "Today in Parliament", because little else does.
My noble friend Lord Sainsbury and his colleague, my noble friend Lord Stone, come from two vastly important businesses and speak with great authority. However, I heard my noble friend Lord Stone say that people ask him how, after 40 years as a trader, he can look so young. I can assure him that now he is a Member of this House we will put an end to all that! The co-operation that has been enjoined between Marks & Spencer and Sainsbury over the years—we heard about it in their speeches—will become even easier as we witness a new phase in that development on our Back Benches.
Their contribution was important and is not to be lightly dismissed, as it was by the noble Lord, Lord Strathclyde—
§ Lord Clinton-Davis
My Lords, the noble Lord says no, but he rejected their arguments, which were strongly in favour of the Bill and the principles underlying it. My noble friend Lord Graham spoke from considerable experience of the Co-operative Movement and an interest in the construction industry. He, too, thought that there were overwhelming reasons for commending the Bill to the House.
The noble Lord, Lord Ezra, comes from a background of considerable commercial experience. I am pleased that that continues, notwithstanding his retirement some years ago from the National Coal Board, where he was a most outstanding chairman. The noble Lord, Lord Alexander of Weedon, speaks as a banker but I remember him best as a distinguished Silk. All those noble Lords made the point that, in principle, the Bill is desirable. I give way to the noble Lord.
§ Lord Strathclyde
My Lords, I cannot let the noble Lord get away with that. I hope that nothing I said gave the impression that I did not entirely welcome the speeches of the maiden speakers. It is a natural courtesy of this House to do so. I rejected their basic argument and it is interesting that the noble Lord has repeated the point. All those noble Lords spoke from the point of view of big business. I wish to protect the interests of smaller firms. Big business can employ another credit controller, someone else to organise the accounts. That 882 is the way to deal with the problem. However, small firms cannot and that is the point to which the noble Lord must address himself.
§ Lord Clinton-Davis
My Lords, the noble Lord, Lord Strathclyde, is making life more difficult for himself moment by moment. The fact is that each noble Lord dealt with small and medium-sized enterprises. The noble Lord, Lord Alexander of Weedon, specifically dealt with that point in his notable contribution to the debate. I do not in any sense seek to say that the noble Lord was being offensive to them. Of course he was not; it is not in his nature to be deliberately offensive. However, the fact remains that they disagree with him, as do I.
We heard a notable maiden speech from the noble Lord, Lord Hardinge, who has considerable experience of the Booksellers Association of Great Britain and Northern Ireland. He, too, declared that the Bill was justified in principle.
I wish to turn to some of the criticisms that have been made. Perhaps I may be forgiven if I do not deal with every point. Where appropriate, I shall write to noble Lords. I wish to examine the speeches with care because they were helpful—even those which were critical. The noble Earl, Lord Home, made play with the responses of business representative organisations to the previous government's consultation on the needs of small firms. Apparently the organisations to which he alluded did not favour a statutory right to interest. Perhaps that was so; I was not party to the consultation and I do not know. Due to my lack of knowledge, I certainly do not wish to refute what he was saying.
However, we consulted widely on our proposals set out in the Green Paper and that represented a different story. We did not rush into the matter, as suggested by the noble Lord, Lord Strathclyde. There was a profound and important consultation. Presented with properly devised policies, we found significant support. I set that out previously and I do not propose to repeat it. I commend to the House the summary of responses which we published on 11th December.
The noble Earl also mentioned experience abroad, specifically in Spain. However, that missed the point, too, because the measure is about expectations and risk. The legislation is about addressing problems which affect cash-flow management. It is imperative that we do whatever we can to stamp out late payment. That has been the burden of the argument across the House today, even from those who oppose what we are doing.
My noble friend Lord Sainsbury cogently set out experience in the Nordic countries, where a right to interest already exists, but we must make our own experience in this matter. We are not presenting the legislation as a panacea and there is nothing compulsory about it, as I have indicated. It is complementary to all the other measures which have been taken and the systems which have been proposed to enable small firms to better manage their finances. The legislation is only a tool, and I agree that proper credit and cash-flow 883 management is also extremely important, as is an efficient court system. The use of the small claims court and the procedures involved are being investigated by my noble and learned friend the Lord Chancellor.
My noble friend asked why an interest rate is not mentioned on the face of the Bill. I should point out that, in drafting legislation, we must ensure that it can stand the test of time. That is why, very often, we must rely on statutory instruments in order fully to implement the legislation. I am not trying to pull the wool over anybody's eyes. The formula is not stated in the Bill because it may not be incumbent on the Bank of England to announce the base rate of interest in the future. If that is so, we may have to announce the rate periodically. But we should like to pin the rate to the base rate if that is at all possible.
Of course, it is necessary to reflect on experience. That is why we are undertaking the research project with Bradford University to which I referred earlier. I assure the noble Earl that we shall be publishing a draft order in relation to the commencement of this Bill which deals with that matter, and we shall be able to consider it in Committee. Therefore, I hope that that gives the noble Earl some reassurance.
I turn to the speech of the noble Lord, Lord Ezra. I welcome his general support for the Bill and I shall take very careful note of the constructive ideas which he put forward. We have not finished consulting on the Bill but we shall continue to do so as it is being considered in this House and in another place. It should not be a matter of real political controversy. There may be technical matters on which we need to consult. Indeed, I have consulted with representatives of business during the course of the past few days.
The noble Earl asked how the Government will deal with any inconsistencies in relation to the proposed EU directive on late payment. Indeed, a number of your Lordships asked a similar question. It is likely to be of theoretical interest at least for the foreseeable future. We have been in consultation with the Commission and have been led to believe that our Bill will not require further legislation if the directive is adopted. But there is a point raised by the noble Earl, Lord Home. The directive has not yet been published and we have not yet seen a draft of it, but it looks as though it is somewhat behind time. With the processes which must be undertaken within the European Union, it is not likely to be enacted within the foreseeable future. I believe that it will take rather longer even than the whole of the period that we are contemplating for the phasing in of this legislation. I hope that that will not be the case but it is the likelihood. But again, I hope that what I have said is reassuring to the House.
I turn now to the concerns expressed by my noble friend Lord Borrie on the directive. The Bill includes powers that should enable it to take on board most possible changes which the directive may bring forward. Clause 5(2) is drafted to ensure that consistency with the directive can be ensured but also to ensure that, if the advice of business and Bradford University is that the rate of interest needs to be a deterrent, we can provide such a rate.
884 My noble friend suggested also eliminating the first phase of the legislation, as did the noble Lord, Lord Ezra. The legislation would then commence by giving small businesses the right to claim interest against all their commercial customers, including other small businesses. In my opening remarks, I explained the rationale for phasing in: it is to ensure that small businesses are given a reasonable opportunity to develop their own payment management systems before they become subject to claims for interest. The Government, with the private sector, are pursuing another range of measures to help them to do so, and I do not propose to go into that again.
I should point out that something like 87 per cent. of business respondents to our Green Paper who expressed a view supported our phasing proposals and 85 per cent. agreed with the timetable. As I have already indicated, we shall bring forward a draft commencement order in time for discussion in Committee.
The noble Lord, Lord Hardinge, noted the performance of the public sector in meeting bills on time. We recognise that the public sector should lead by example. We propose to require all government departments, agencies and local authorities to pay on time and if they do not, they will be subject to the provisions of the Bill before the House today in relation to commercial contracts. We shall publish tables of the payment performance of central and local government. We have published recently a league table of the payment performance by departments for the financial year ending March 1997. The fact is that the majority of departments paid more than 97 per cent. of their bills on time. I do not claim credit for this Government for that. The previous government sought to impose that obligation on their departments.
All departments have signed to the CBI Prompt Payers Code and the British Standard for Prompt Payment, BS7890, has also been adopted.
The noble Lord also raised the legitimate concern that the Bill does not allow for end-of-month billing arrangements like BACS. I assure the noble Lord that it is our intention that such billing, where it is agreed by both parties to the contract, should still be permitted. I refer the noble Lord to Clause 14(2).
My noble friend Lord Borrie questioned whether it was necessary to prevent contracting out of the legislation. We understand that concern. But cash flow risk has a cost for the entire economy and must be addressed. Therefore, I agree with my noble friend that, if contracting out were allowed, there must be a risk that small businesses would be bullied into accepting contracts which do not provide a remedy for late payment. That should not happen.
My noble friend raised also the matter of the treatment of conditional sales and hire purchase agreements. Those have been excluded because they are used to grant authorised credit and usually provide for interest payments on default of the periodic payments being made on time. The supplier is normally more powerful than the customer and can insist on interest. In contrast, hire agreements may be used to provide goods for short-term projects and may not include provisions 885 for late payments. We are giving consideration to excepting longer term hire arrangements where the asset is provided for much or all of its economic life span, as those agreements are on a par with those for authorised credit.
On the question raised by the noble Lord, Lord Alexander of Weedon, Clause 6 is designed to provide remission of interest where the creditor's conduct makes it unjust to require interest. That will cover circumstances of incorrect invoices, tardy responses to queries, being unavailable to receive payment and so on. But it is not possible to provide an exhaustive list of circumstances in which remission should be available. The noble Lord would probably concede that. But Clause 4(4)(b) also provides that the statutory credit period of 30 days does not start to run unless the debtor has notice of the amount due.
The noble Earl, Lord Kintore, raised the fear that suppliers would be afraid to claim interest from their customers. Of course there is a risk of that but I believe that the customers will be slow simply to cut off a supplier because of that particular issue. It is costly; it is bureaucratic; and it is difficult to find good suppliers just like that. I believe practice will ensure that that fear is much greater than the reality.
The Federation of Master Builders was mentioned by my noble friend Lord Graham. I assure him that I believe that payment will improve shortly within the building industry. There is a scheme introduced by the Department of the Environment and our scheme here is complementary to that.
I do not have time to go on and I have spoken for long enough in a wind-up speech. However, a number of important points were raised which, I assure the House, we shall consider in depth both before Committee and during the Committee stage in the Moses Room within the course of the next few weeks.
This measure has been mooted for some time. It is supported strongly by small business. We have sought to limit the restrictions on freedom of contract to the barest minimum consistent with the aims of the Bill. It is an important step in reducing business risk and improving the competitiveness of the country as a whole. For those reasons, I commend the Bill to your Lordships for a Second Reading.
§ On Question, Bill read a second time and committed to a Grand Committee.