As I noted on this blog yesterday, Rishi Sunak's suggestion that £330 billion of loan funds might be made available to struggling UK businesses is entirely inappropriate for those that already face the risk of insolvency.
Under UK Section 214 of the Insolvency Act 1986, wrongful trading occurs when the directors of a company permit it to trade past the point when they:
- knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, and
- they did not take every step with a view to minimising the potential loss to the company's creditors.
An example will help. Consider a company that is turning over (making sales of) £2 million a year. Its direct cost of sales (the cost of the materials that it purchases) are 35% of turnover; its labour costs are 30% of turnover and its other overheads (rent, insurance, and so on) come to another 30% of turnover. As a result 95% of its income is committed. But that still leaves it with a profit of £100,000 a year. Out of this sum £20,000 is paid in tax and £50,000 is paid in dividends to the shareholders, leaving £30,000 to be added to its retained earnings on its balance sheet. That balance sheet suggest that the company has a total net worth of £150,000 and the directors believe that this is a fair reflection of its net asset worth on a going concern basis i.e. presuming that it remains in business. They acknowledge that there would be little value if the business ceased to trade.
Now let's presume that coronavirus has effectively shut the business down, as is happening all over the UK. Sales have effectively ceased. The business is suffering from the fact that the government has told people not to come to its premises. The business will, of course, stop buying goods for resale, so there will be an immediate saving there. Let's suppose that half the overheads can be cancelled, but paying the rent and maintaining the website and paying the operating leases, and so on, cannot be cancelled. That means that the company has an ongoing commitment to spend of, maybe, £25,000 per month, excluding wages.
With wages that increases to £75,000 per month. If all staff were to be retained the loss would, then, be of that net amount each month. That means that in two months losses equivalent to the entire net worth of the company would have been suffered. After that the company could, very easily, be insolvent. What is more, given that it is very unlikely that the coronavirus lockdown will last just two months, and the prospects for the business picking up to its old level of trading when the lockdown has ceased look to be decidedly limited given the universal impact of that downturn, the chance that the directors could reasonably conclude that they could avoid insolvency on day one of their losing almost all their turnover will be remote in the extreme. At that point it could be reasonably be claimed that they should have taken action to protect the creditors. That is most particularly true with regard to their staff, who at that point could have been due redundancy pay, with the company being able to make payment of it. Continuing without making the staff redundant, and so seeking to avoid making those payments, would, by itself, have prejudiced those employees as creditors. In my opinion the directors would, then, have been negligent.
Now just suppose that the government offers a loan of £300,000 to supposedly let this company continue to trade. What is readily apparent is that the company is in no position to accept this loan. At this precise point in time it has no trade. If they accepted the loan and used it to meet its costs, including staff, for four months then it will lose the entire sum borrowed over those same four months. At the end of that period it would be insolvent to the tune of £150,000, at least, and have no resources left to meet its obligations to the staff who would then still be redundant when the cash ran out. But now the creditors would also include £300,000 of additional borrowing. In other words, the directors would have illegally prejudiced all the existing creditors by taking the loan.
What this simple, but wholly realistic, example should make clear is that for very large numbers of companies that find themselves in this awful situation a loan is of absolutely no benefit whatsoever. It cannot save the company. It cannot preserve jobs. It might even prejudice the interests of the employees to offer such a loan now when at this moment their interest should be the absolute priority of the directors, who should be trying to make settlement of redundancy payments due to them. And what is true is that this situation is now facing companies right across the UK, from airlines to airports, to hospitality businesses, to retailers, and even car manufacturers, whose sales are going to virtually disappear for the rest of this year, at least.
When commercial wipe out is on the cards loans do not work. But nor, as I suggested yesterday, can the government simply replace the missing sales: that is equally reckless, and inappropriate. What is, instead, required is support to keep the business going.
Rent, rates , tax and business loan and leasing holidays are essential. Nothing less will do.
But that still leaves the problem of staff. And the simple fact is that many businesses cannot pay their staff right now, but the cost to society of making all these people redundant is immeasurable. Which is precisely why I suggest that the government should cover the entire cost of a large proportion of the net pay due to these staff, the tax due having already been covered by a tax payment holiday. If staff are also offered mortgage and rent holidays that proportion of net pay that need be paid need not be anything like 100% of their usual net pay: 60% may be sufficient in that circumstance, and as a rule of thumb seems about right, even if (I accept) some rough justice will result, which is almost inevitable at present. It is this plan that can keep business going.
Rishi Sunak offered UK business the last thing it needed yesterday. As I have suggested, I think he did so to keep this cost off the government's deficit. He tried to put it on the government's balance sheet instead. But that was a gross error of judgement. Only the government can bear the cost of these losses. And it has to bear them if it wants to avoid the most appalling commercial catastrophe. If that is not to arise during the course of the rest of 2020 then it has to simply accept these costs now and stop pretending that they can be dealt with through loans to businesses or grants of inconsequential amount.
This then leaves the question as to whether this would work for the company that I have used in my example. I suggest that it would. All staff costs would now, in effect be covered by the government. There will be no rent to pay, no rates to pay, and no bank loan repayment necessary. That would also save some leasing costs. Overheads would, then, be slashed. Without any direct cost of sales, and with all discretionary overheads cut to the absolute minimum, this company could, then, be kept going using its own existing resources to the point in time when we could hope that the coronavirus would be over. My scheme gives this company a fighting chance. The governments gives it no hope at all. And that's what Sunak got wrong.
Crucially, this is also easy to legislate.
Bank loan repayment holidays, rent repayment holidays, rates holidays and tax deferrals can all be legislated in a day or two. And an instruction could be given to all businesses to pay 60% of net pay to staff who would otherwise be made redundant. The business would have to show why they were making that claim: excess profiteering during this period would be subject to 100% tax and director penalties after the event, I suggest as disincentive to avoid. I could draft that in a morning, and all that would then be needed would be for the PAYE scheme to go into reverse to make repayment to businesses, which is entirely possible.
And yes, the self employed would need something else, I agree.
PS With apologies for typos: this is written on a morning when I still seem to be suffering coronavirus style symptoms. I'm going back to bed now.
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Clear, concise and worrying. Nothing the Tory Govt does can ever be taken at face value. I wonder if any of the papers will realise what’s really behind their strategy? Oh, and expect something for airlines and aircraft industry – just what we really need.
The Italian president signed a decree “cura italia”. On a first reading it seems it contains everything you wanted in your last paragraph.
Any link?
Front page of all Italian papers. Have not seen any English language translation. Longest in ilsole. Most accessible in Corriere
A summary in English – https://www.italiani.it/en/cura-italia-the-economic-package-against-this-pandemic.
Take it easy, Richard. Seriously. The blog will survive a day or two of inactivity. You need complete rest. Lie in bed with headphones and listen to soothing music. Of course it’s frustrating but tuning in & then reacting to all the crap news won’t help your recovery. It’s an incompetent, reactionary Conservative government in power so you know what not to expect.
Best wishes for a return to sustainable good health asap.
I’m taking rests – I promise you….
Douglas Fraser (BBC Scotland business journalist), faced with frazzled business people unable currently to find the basic facts of loan guarantees, the terms, the application requirements or anything else; recommends they contact their relationship manager in their bank. As far as I can see, this is because the banks will be the conduit to the Governments resources to SMEs.
If I understand this, the Government has handed everything to the banks; again. They would, wouldn’t they? They always do. They handed the 2008 Crash to the Banks both to create it, and to fix it. Only the Banks didn’t fix it. They looked after themselves. They would, wouldn’t they? We had Austerity instead, and now a hollowed out NHS.
The Conservative Party always chooses bankers to be Chancellor. They would, wouldn’t they. Because bankers know how to do one thing, very, very well: looking after banks and bankers. They are doing it again. They would, wouldn’t they?
Meanwhile everyone else is discovering that when the ‘chips are down’ reality consists of community (you know, the thing conservative like to claim doesn’t exist – except when the want to exploit it – “we are all in it together”) and – people. It is people that matter; business depends entirely on people.
There has to be a delivery mechanism
They have chosen the wrong one
HMRC surely best delivery agent?
Yes…
Richard, of course the Government’s proposal needs a delivery mechanism. The banks will borrow cheap and be able to lend out at a higher rate. After all they can’t be expected to give their money away. The only people who will be able to afford a slice of the £300b will be the hedge funds etc al who will borrow to buy up the assets of bankrupt businesses at distressed prices. They will then rent them out/sell to the replacement companies. An absolute bonanza for the City. They will make a killing. The Tories are simply rewarding the people who fund them while pretending to care for Northerners. Finance Capitalism the gift that keeps on giving.
I have to agree with your broad conclusion on the banks and hedge funds, Mr Adams. It is the simplicity of it, while we are all busy looking somewhere else, and the hand washing slowly turns into hand-wringing…..
Well done – and have a good rest for goodness sake.
I still have to ask however – what else would you expect from a financial disaster capitalist like Sunak/the Tory party?
You could just imagine how the information in loan book will be shared with their cronies in the City – the vulture funds circling, taking out more swaps.
The situation with the Tory Government is rather akin to asking a load of arsonists to fight fires. It’s not good.
I’ve been asleep again
I’m leaving politics aside right now
This just showed massive business / accounting incomprehension
That’s widespread
‘Glad that you have had a sleep.
Should you break off for a day or two?
I’m not sure I’d know how to do that…
As the manager of a brewery in the Midlands with 20+ staff and a CEO who runs a well organised, liquid business, I can confirm that you are correct in your analysis. After the end of next week we have enough cash flow to pay wages for 2 weeks and then it’s either use up holidays or unpaid leave. The day after his announcement our pre sold sales for that week halved over night as customers – who are rightly concerned – rang to cancel. We are shutting down brewing as of today so all our suppliers will also see their orders dry up. This will be going on all over the country as we speak. Unspeakable really.
Karl
Good luck…..I am doing my best
I am sure you are too
Richard
Thanks Richard.
Keep chipping away at them and get well soon.
Karl
Good stuff for a fluy headed morning ! Look after yourselves by bed and self isolation and friends, relatives and neighbours.
Heres my tuppence.
As we are to be subjected to mass systematic terror, illness and death why are we expected to keep paying money to our creditors and ultimately the banks?
If all interest payments were immediately banned and all capital repayment ceased then life would be survivable for all borrowers currently- these with mortgages, loans and credit cards.
So what about renters?
All rent payments must be cancelled immediately and the creditors must do without for the duration. That means Councils, Housing associations, private landlords will not collect or demand that rent – in effect granting a rent holiday for the duration of the emergency.
What about gas/elec/water/telephony?
– All charges for such basic utilities to immediately cease for all individuals and homes.
What about subsistence costs?
(Food,travel, toilet paper…)
All should be paid a minimum equal amount to spend at shops to get that.
A basic income must be paid out to EVERYONE and covered by the state. If employers want to pay out more than that it is upto them but the extra will not be covered by the state.
What about the companies who provide free utilities/ the private landlords , the mortgage and loan companies?
All these will be excused from paying their current taxes and capital and interest payments as above thus reducing themselves to providing a national service!
The private landlords will be excused making loan and interest payments on their buy to let mortgages, along with everyone else. Their tax liabilities on these lost profits won’t need paying. And they will all be entitled to the same subsistence as the rest of the …. the poor bankers that lose their revenue and guaranteed profits?
But what about …. the poor bankers that lose their revenue and guaranteed profits from their magically invented money… and shareholders?
Let them make do with the same as everyone else as above – it is after all a Emergency and making profits is not a priority.
That is what Labour should demand today at pmq’salong with emegeny recrutment of NHS staff and nationalisation of private empty beds and a massive import if Chinese kit and experinced staff
We’d have this cracked in weeks and be left better off with a continued systematic change!
You can think appropriately in ways Sunak never will….
Crystal clear. Thank Hume our country isn’t run by arts graduates and hedge fund managers, or we would be in real trouble.
The Governments position is entirely reasonable.
If they are seen to pump money into the economy then long term anger will follow at the under investment in public services and austerity.
Keep to their position, tank the economy but maintain their political capital appears to be the motive for now.
Either way, the Tories have most likely lost the next election (as did Churchill) and Lanour may be found wanting too
You are clearly clueless in the face of the emergency that we face
Making a lot of sense.
£350bn of loan finance will thus enrich the bad actors in all this – if I had a bad business, I would be quite happy to borrow lots via a loan guarantee scheme and then walk away in the fog of post CV19.
And, still nothing on self employed, UC, or generally getting money in the hands of those who need it.
Good suggestions above though – thank you.
What was the national response to Spanish flu, which killed perhaps 250,000 in the UK (and infected perhaps 500 million people around the world and killed perhaps 50 or 100 million of them)? As I understand it, it came in three waves in the UK, a small initial one in June/July 1918, a big one in late 1918/early 1919, and then another smaller one around March 1919.
For context, the First World War killed 700,000 from the British Isles serving in the armed forces, and 1.6 million wounded, when the UK population was about 40 million, about a third smaller than it is now.
Did museums, theatres, pubs, restaurants, close; all sports events cancelled; everyone told to work from home? Was any kind of national support scheme was put in place? Or, in our pre-NHS, pre-welfare state days, were people left to fend for themselves, and businesses allowed to go to the wall?
That I know of there was no response
So 250,000 died
We’d prefer that did not happen now
Proff incase you are wondering whether you have it or not, i’ll quote two paragraphs from a statement by a clinician at a UK hospital for reassurance, the opinion below that is mine.
‘ Just want to say — I’ve seen quite a few people with Covid 19 since Sunday. The vast majority are fine. They seem to have one week of fever, a few days of dry cough and then sometimes breathlessness on day 8 or 9. Most people are fine to stay at home and recover in about 10 days. If it is going to be bad it is around day 9 or 10 and the breathlessness gets rapidly worse at that point. We have had five patients who needed ITU but they all have heart or lung disease, and are quite elderly. Thankfully children seem to be invincible.’
&
‘I’ve never known anything like this — but we’re planning for huge numbers of people needing intensive care and working out how to cope. We’ve managed to segregate our whole hospital into unknown (in single rooms), positive and negative areas. We’ve moved a whole intensive care unit and 4 other wards in 3 days flat — this sort of change usually takes at least 6 months to get agreed!’
————-
Covid is not so mighty that it will lay flat the mountains of the earth – nor is it so beningn that it will not leave the hospitals and carers overwhelmed during the peaking infection – we need to concentrate on the people most effected by the economic fallout immediately.
(Btw I had something like what is described by the symptons at the beginning of February- before it was a ‘thing’ here, thought it was a flu if a bit fierce for about a week – a lemsippy drink twice a day helped rest and sleep. Who knows what it was? As there is no testing available)
I am aware of the day 8 risk…on day 6 it feels ok but warning noted
[…] Professor Richard Murphy from Tax Research definitely thinks the £330 Billion loan is a bad idea. He argues that these loans will end up shoring up companies that are already insolvent and paying for lost sales and not helping the business to be in good shape when the crisis is over. The fact is the companies can take this money and use it to replace lost sales, pay their debts and bolster their cash flow before any goes to their employees – so it only indirectly ensures that employees are looked after. The best way is to spend money suspending rent, tax or provide proper business loans and leasing holidays […]
[…] tax campaigner Richard Murphy questioned the loan-based response in his blog: “Rishi Sunak offered UK business the last thing it needed yesterday. I think he did […]
As a pensioner with a mortgage With fixed income I guess I would not require a freeze on my mortgage.Maybe people like me would keep the overall figure down.
Small amount proportionally though
Good article
Thanks for the grim realism here. May I add to it? HMRC has had the opportunity to reform PAYE and build a full, direct relationship with the accounts of tax paying employees. It didn’t do that. Employers remain the withholding agent for personal tax. The banking network returns the monthly detail of the actual payments made, and that data is shared with DWP, but the benefits side of the relationship is sized and scaled for the ‘few that will need it in a healthy free market economy’. Unlike Denmark and Sweden, the UK lacks the mechanism to support its citizens directly because it is somehow seen as interventionist or socialist to do so. A time when it is digitally possible to do this securely (underpinned by a digital identity infrastructure that is privacy-respecting) the UK’s politicians have failed to prepare and care, leaving the burden of caring to fall on underpaid care workers.
Leaving the state failures aside, if anyone is up for grass roots reform, this is a good time for caring businesses to join mutual exchanges to reduce the need for short term cash and forge new networks. Some failing businesses may even reach out and find a new future as multi-stakeholder cooperatives, with employees and customers as owners.
It would have been great for that to be a government policy, but we can do it ourselves. What is there to lose?