Rise in Business Confidence in Scotland

It was good to hear that overall business confidence in Scotland is on the rise, according to a new report. 

The Business Barometer from Bank of Scotland Commercial Banking for June found that companies in Scotland report confidence in their business prospects at 29% and economic optimism at 18%.

Together, this gives an overall confidence of 24%, which is nine points above last month’s figure of 15%.

Longer term, the underlying trend in Scotland during 2018 shows businesses’ confidence growing slowly despite the fact that they are becoming less optimistic about the state of the UK economy overall.

Overall confidence in the second quarter of 2018 stands at 23% per cent, which is two points higher than during the first quarter, while economic optimism has fallen four points to 13%.

Across the UK as a whole, however, overall confidence has fallen six points to 29% since May, as firms’ optimism about the economy dipped, weighing down confidence in their own business prospects.

“It’s encouraging to see the gradual rise in confidence across the country leading to a boost to recruitment plans throughout Scotland,” commented Fraser Sime, regional director for Scotland at Bank of Scotland Commercial Banking.

“The challenge we face now is to keep these levels steady and support the rise in economic optimism to ensure businesses reach their full growth potential,” he added.

Across Scotland, a net balance of 16% of businesses say they feel that the UK’s exit from the European Union is having a negative impact on their expectations for business activity, down nine points on a month ago.

Meanwhile, a net balance of 46% of Scottish companies expect the Bank of England to increase interest rates this year, with the average firm indicating that raising rates to one per cent would have a significant negative impact on their business.

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Carillion Collapse Impacts on Small Construction Firms

Small construction companies are increasingly being impacted by payment delays, and this impact has been further exacerbated by the collapse of Carillion.

This is the conclusion of new research by business finance website Funding Options, which found that suppliers now have to wait over 42 days on average for invoices to be paid, up from just over 40 days on average five years ago. Construction businesses are extending delays in paying suppliers, which can threaten the whole supply chain’s financial stability, putting jobs at risk and threatening the Government’s ambitious housebuilding targets.

It highlights that construction supply chains often include many small and medium sized businesses with tight profit margins, which can find it difficult to deal with payment delays.

In addition, many large businesses in the construction industry are able to stipulate long repayment terms to suppliers. Many smaller suppliers to Carillion, for example, had to agree to 120 days for payment. Following Carillion’s collapse in January, these businesses received almost none of the payment they were owed. Some estimate they will receive at most a penny in the pound.

These payment delays are contributing to a high level of insolvencies in the construction sector, with 2,633 construction businesses going insolvent in 2016/17, rising 8% from 2,447 in 2015/16.

“A single late payment can be an issue even for larger and more successful firms, and worsening delays could create more insolvencies,” commented Conrad Ford, CEO of Funding Options. “Carillion’s collapse sent shockwaves through the industry, affecting smaller suppliers who will now never get paid what they are owed. Construction businesses have high overheads and labour costs, and many cannot afford to wait for payment for lengthy periods of time.”

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Consulting on Collective Redundancies in Insolvency Situations

Insolvency and restructuring trade body R3 has welcomed the news that the Government intends to produce new guidance for consulting on collective redundancies in insolvency situations. 

Following a number of high-profile insolvency cases where employees were made redundant without the full statutory consultation period, the Government has been looking at reforms that could be made to redundancy consultations.

R3 has long called for reform so that inevitable clashes between insolvency and employment law can be resolved. It says that the Government’s proposed guidance could help get a better deal for employees, employers, insolvency practitioners, and the taxpayer.

“Collective redundancy consultations are required by statute but the special nature of insolvencies, and the speed with which they happen, often result in an inability to undertake the full consultation process,” explained Caroline Sumner, R3’s technical director. “A full consultation requires an alternative to redundancy which often isn’t there when a company has failed.”

“The cost of keeping staff on and running the consultation means less money can get back to creditors, but maximising creditor returns is one of the primary goals of an insolvency procedure,” she said. “Not making staff redundant quickly could prevent them from accessing benefits or applying for new roles, trapping them in a situation where they’re not being paid by their insolvent employer.”

“While the Government says it will consider regulation in future, we should see how the guidance works first,” she added. “Insolvency practitioners find themselves in an impossible position when caught between employment law and the realities of an insolvency, so additional regulation would have led to punishment for practitioners trying to do their jobs with few alternatives.”

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Committees Publish Final Report into Carillion Collapse

The final report by the Work and Pensions and BEIS Committees into the collapse of Carillion has been highly critical of both the company’s board and the Big Four auditing firms. 

It has called on Government to carry out an “ambitious and wide-ranging set of reforms” to “reset our systems of corporate accountability”.

"Carillion’s collapse was a disaster for all those who lost their jobs and the small businesses, contractors and suppliers left fighting for survival,” commented Rachel Reeves MP, Chair of the BEIS Committee. “The company’s delusional directors drove Carillion off a cliff and then tried to blame everyone but themselves. Their colossal failure as managers meant they effectively pressed the self-destruct button on the company.”

"However, the auditors should also be in the dock for this catastrophic crash,” she added. “They are guilty of failing to tackle the crisis at Carillion, failing to insist the company paint a true picture of its crippling financial problems. The sorry saga of Carillion is further evidence that the Big Four accountancy firms are prioritising their own profits ahead of good governance at the companies they are supposed to be putting under the microscope."

The report notes that successive Governments have nurtured a business environment and pursued a model of service delivery which made a collapse like Carillion’s almost inevitable, and claims measures that Government has taken to improve the business environment, such as the Prompt Payment Code, have proved wholly ineffective and need revisiting.

It has also highlighted that when Special Managers are required for an insolvency, the companies must not be given a blank cheque. The Insolvency Service should set and regularly review spending and performance criteria and provide full transparency on costs incurred and expected future expense.

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Contains Parliamentary information licensed under the Open Parliament Licence v3.0.

Latest Figures Reveal Rise in Scottish Corporate Insolvencies

The latest statistics from Scotland’s Accountant in Bankruptcy (AiB) have revealed that corporate insolvencies increased from 846 in 2016-17 to 886 in 2017-18.

On a quarterly basis, the number of Scottish registered companies becoming insolvent or entering receivership increased in the fourth quarter of 2017-18, with 259 companies becoming insolvent compared with 155 in 2016-17 Q4. There were 119 members’ voluntary liquidations (solvent liquidations), the same as in 2016-17 Q4.

Commenting on the figures, Tim Cooper, Chair of R3 in Scotland, the insolvency and restructuring trade body, said:

“In many respects, this rise is not too surprising. Insolvencies of well-known companies have featured regularly on the newspaper front pages since the start of 2018, with further reports of firms scrambling to renegotiate rents and contracts with suppliers and landlords.

“Many companies are facing a complex trading environment. Staff costs are rising; there are concerns about the availability of staff after the UK leaves the EU next year; new technologies promise a productivity boost, but investing in as-yet unproven assets and software can be risky. There is also the prospect of at least one interest rate rise later this year.

“Any company director who is unsure as to the best way forward should consider taking advice from a professional source, whether or not their business is currently struggling, as the rate of change in the economic environment shows no sign of slowing down.”

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Rise in UK Insolvencies Forecasted

A new report has forecast that insolvencies are to decrease globally by -1% in 2018, although the number of bankruptcies will remain higher than in 2007.

According to the Global Insolvencies Index by Euler Hermes, the UK will be one of the countries to experience an increase in insolvencies, with numbers forecast to increase by 8% in 2018.

It says that as Brexit approaches, importers and consumers have been affected by raising input costs and a weaker pound. The report highlights that the UK is an exception in Western Europe, where most countries should experience either a decrease or stabilisation in the number of insolvencies thanks to the economic recovery and supportive monetary conditions.

The Index also points out that despite the rebound in growth and trade globally, more and more domestic sectors are exposed to large business failures. In 2017, large insolvencies increased by +21% with notable increases in services, retail, agrifood and construction. According to Euler Hermes, competition and digital disruption help explain this trend and subsequent risks for suppliers.

“All in all, insolvencies are stabilising worldwide after seven years of decreases,” said Ludovic Subran, Chief economist at Euler Hermes. “This confirms the return of credit risk with the economic recovery. In 2018, companies in Asia, Latin America, Eastern Europe and the UK should be closely monitored. In addition, large bankruptcies are increasing fast as disruption in industries such as services and retail leaves no one unscathed. Mind the domino effect!”

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Concerns over Financial Audits of Charities

The Charity Commission has raised concerns over perceived failures by auditors to alert the charity regulator to matters of material significance identified in charity audit reports.

According to a recent review conducted by the regulator, of the 114 auditors who gave audit opinions containing information they were required to report to the regulator in the six months to October 2017, only 28 contacted the Commission.

The Commission says it is now working with the accountancy profession to raise auditors’ awareness of requirements and address this under-reporting, which it describes as raising a ‘significant concern’ about the adequacy of reporting to the Commission by auditors.

The regulator undertook the review to test compliance with rules that came into force from May 2017, extending the list of reportable matters to include modified audit opinions, such as paragraphs about an emphasis of matter or a material uncertainty regarding going concern – meaning there are doubts as to the charity’s ability to remain solvent.

The new rules are designed to help the regulator intervene in a more timely way, notably where charities face financial difficulty putting their future at risk. They follow the Public Administration and Constitutional Affairs Select Committee’s inquiry into the collapse of Kids Company, which recommended clearer guidance to auditors on the issues regulators expected them to report.

Of the 28 auditors who made a required report to the Commission, only six did so promptly, or within one day of signing the audit opinion; three waited more than two months to alert the Commission.

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Meat Supply Company Enters Administration

A company that supplies meat to a variety of businesses, including hospitality, catering, schools and care homes, has gone into administration following an investigation by the Food Standards Agency (FSA).

The FSA investigation meant Russell Hume had to recall its meat products and many customers subsequently stopped using them as a supplier.

According to the BBC, the directors of the company said that the actions of the FSA had "created impossible trading conditions for us" and that it had no choice but to go into administration.

The administrators of the company, which has production bases in Fife, Liverpool, Birmingham, London, Boroughbridge and Exeter, have had to make 266 members of staff redundant. They are also currently seeking potential buyers for the business and its assets.

A statement on the FSA website said that:

“There is no indication that people have become ill from eating meat supplied by Russell Hume. However, we are concerned about the poor practices in place at their premises so that is why we have taken proportionate action to ensure no meat can leave their sites at present. We are continuing to assess the situation.”

However, the firm’s directors said that while they would cooperate with the FSA investigation, they felt that "its action has been out of all proportion to the concerns it says it has identified”, reports the BBC.

Administration provides the company protection from action taken against it by creditors and offers breathing space to consider a rescue plan. The administrators take over the management of the company and are responsible for realising assets on behalf of all creditors.

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