The collapse of Carillion will have significant effects throughout the UK construction and outsourcing sectors.
Estimates suggest that £1.5bn or more may be owed by Carillion to its creditors, including many SMEs and small suppliers. Carillion’s collapse highlights the pressing need for businesses to manage credit they extend to customers and ensure, as fully as possible, that they are paid on time.
As a lawyer negotiating supply agreements, some issues come up time and time again. Payment terms – how long a customer will take to pay a supplier’s invoice – is a common one. Commercial discussions may not address when payments are to be made and so it can emerge as an issue when the ‘small print’ is tabled.
Contracts usually state by when invoices must be paid. This can be anything from ‘immediately’ to 90 days or more after receipt. Some customers will only make 1 or 2 payment runs in a month so, depending on when the invoice arrives, that can add additional time. Some contracts provide automatic discounts for ‘early’ payment – often within periods such as 60 days – or require suppliers to sign up to financial instruments for accelerated payment.
This is, up to a point, understandable. It is not realistic to expect organisations to pay for goods and services upfront, nor is that normally advisable. However, the routine insistence by many large companies on long periods to pay invoices operates in practice as a conscious and intentional transfer of working capital from small to large businesses. This can cause SMEs cashflow problems and, in extreme cases, render them insolvent. In particularly unfortunate cases, if the customer becomes insolvent it can mean suppliers do not get paid at all. Evidence is mounting of Carillion suppliers who have little prospect of getting paid anything.
Successive Governments have tried to address this problem to an extent. Last year, new regulations were made under the Small Business, Enterprise and Employment Act 2015 which require large businesses to report twice a year on their payment processes. These reports will be made available online. Implementation of these regulations means most companies will only need to start doing this in 2018.
There is also the Late Payment of Commerical Debts (Interest) Act 1998, which allows application of compulsory interest rates for overdue amounts. However, this is of limited practical benefit because interest rates can be varied (downwards) in the contract, and normally are. It also only applies once payments become overdue, which only happens once the payment period in the contract has expired. Companies can also sign up to the Government Prompt Payment Code – a voluntary commitment to pay 95% of invoices within 60 days and to work towards adopting 30 days as the normal practice. Many Government suppliers (including Carillion) have signed this.
Carillion’s collapse will refocus attention on whether these measures go far enough. In the meantime, though, all businesses should understand the effect on their cashflow of agreed payment terms and negotiate wherever possible to improve terms that are too exacting.
Liam McMonagle is a specialist Intellectual Property, Media and Technology solicitor. We are always delighted to talk without obligation about whether we might meet your needs. Call Liam on 0131 225 8705 or email lmcmonagle@thorntons-law.co.uk
