The Government is investigating invoice abuses of the administration process by invoice finance providers, following an investigation by The Telegraph
The Government is investigating “abuses” of the administration process by invoice finance providers.
The Treasury and the Insolvency Service have begun the inquiry into the unregulated industry following an investigation by The Telegraph that revealed that lenders are exploiting company failures at the expense of the taxpayer, business owners and other unsecured creditors.
Entrepreneurs, industry insiders and a campaign group told this newspaper that some invoice finance firms are abusing contractual fees and their preferred creditor status to force firms into administration.
They then collect the outstanding debts, charge the business so-called “termination” and “collection” fees, and in some cases even fund a new “phoenix” business to repeat the process.
A spokesperson for the Business Department said:
“The Government is aware of the concerns that have been raised and is currently looking into them in more detail. BIS, the Treasury and the Insolvency Service are all engaged, and we are in contact with relevant industry bodies.”
Brian Moore, of the Campaign for Regulation of Asset- Based Finance, said:
“We’re ecstatic that the Government is looking into the obscene abuse that has been going on, where the banks have gorged themselves at the expense of HM Revenue & Customs and thrown thousands of people out of work in the process.”
Conservative MP Nick Boles, a key ally of David Cameron and the new planning minister announced in last week’s Government reshuffle, has outlined his concerns over the alleged abuses to the Treasury and HM Revenue & Customs.
The former business owner will now be invited to take part in the investigation.
Frances Coulson, former president of insolvency trade body R3, warned that “an enormous amount of abuse at the murkier end of the industry” is leaving the taxpayer out of pocket by “hundreds of millions” of pounds.
The high street banks and independent providers which make up the industry justify their controversial fees as the costs of collecting the outstanding secure debt in a failed company. However, fees can be around 20pc of the entire sales ledger value rather than the outstanding balance.
There is also concern over the links between insolvency practitioners and the industry. Brokers who pass leads to lenders are often owned by insolvency practitioners. Since the invoice finance provider, as secured creditor, can then choose which administrator to appoint and when, this can create a conflict of interest.
“We [the insolvency firm] give you a client, you bust them, you get the termination fees and we get the administration”, was how the boss of one invoice finance lender described the “worst cases”.
The growing industry’s advances to companies stood at £15.7bn at the end of 2011.
Mr Moore believes the removal of the Crown’s preferred creditor status in 2002 – designed to aid business rescue – created the problem.
Ian Johnston, an independent invoice finance provider, has also warned that administrations can be “highly lucrative” for lenders.
“Most industry insiders… agree that regulation is long overdue and necessary to cut down on the excesses.”
The Government said it is examining the “extent of the problem, if any, and what might be done to resolve it”.
The article was written by James Hurley and appeared in the Daily Telegraph on 8th September 2012