Invoice finance firms’ "abuses costing taxpayer millions"

| August 25, 2012 | 0 Comments

Abuses of the administration process by invoice finance firms are costing the
taxpayer “hundreds of millions of pounds”, the former president of the
insolvency profession’s trade body has warned.

Frances Coulson, former president of R3, said there is an “enormous amount of
abuse going on at the murkier end of the [invoice finance] market” as
invoice finance providers, sometimes in collusion with insolvency
practitioners, profit from putting companies into administration.

Banks and independent providers are exploiting contractual fees and their
preferred creditor status to make money from struggling businesses, she
said.

Ms Coulson’s warning follows an
investigation by The Daily Telegraph which revealed that some
lenders benefit from corporate failures at the expense of the taxpayer and
other creditors.

She (SNP: ^SHEYnews) said the law firm where she works as a senior partner, Moon Beever, had
worked on a number of these cases, which had “cost the taxpayer hundreds of
thousands of pounds and we’re only a small practice”. The issue had “been
picked up in recent Government insolvency consultations but ignored”, she
said.

Invoice finance is a form of asset based lending which sees cash advanced to
small and medium-sized businesses against their sales ledgers.

So-called “termination” and “collection” fees are charged by providers when a
company goes to the wall.

The fees are designed to cover the risk of a client leaving before the end of
their contract, and the administration costs of collecting outstanding debt
in a failed company. However, fees can be about 20pc of the entire ledger
value rather than the outstanding balance, and such fees have even been
applied when there is no outstanding balance.

Scores of business owners and industry insiders have contacted this newspaper
this week to warn of unethical practices linked to the fees in the
unregulated industry.

An invoice finance broker said: “Certain larger independent [lenders] have
created havoc among their clients. They are trigger happy to appoint
administrators so that they can gorge themselves on surpluses in customer
sales ledgers using aggressive … clauses.”

He claimed that owners of affected companies are sometimes threatened with
bankruptcy proceedings if they try to hold up the process and he had seen
directors “become suicidal” as a result.

Ms Coulson added: “It is not uncommon to see a lender fund a [failing company]
which has already ceased trading so it can nab the termination fee, often
[as much as] £500,000, as well as fund the [new business]. Usually it is the
taxpayer that is left behind.”

She added that bad practices would be challenged if creditors appointed an
independent insolvency firm. However, the brokers who pass leads to lenders
are often owned by insolvency practitioners. This can create a conflict of
interest since the invoice finance provider, as secured creditor, can choose
which administrator to appoint and when.

The boss of an invoice finance lender admitted the relationship between
insolvency and invoice finance firms had “got silly”. He described the
“worst cases” as “we [the insolvency firm] give you a client, you bust them,
you get the termination fees and we get the administration”.

Brian Moore, who is leading a campaign for the regulation of the industry,
called for an asset based finance ombudsmen and rules to prevent conflicts
of interest between brokerages, insolvency firms and funders.

“We’re not against invoice finance,” he said. “It can be a good product that
should be promoted, but only once the industry is regulated.”

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