Business news 6 October 2022
James Salmon, Operations Director.
Supreme Court rules directors only owe duty to creditors on real risk of insolvency. Britain’s services sector comes to a standstill. Cap on energy bills expected to cost £89bn. Small businesses sound the alarm over surging UK interest rates. And more business news.
Supreme Court rules directors only owe duty to creditors on real risk of insolvency
The UK’s Supreme Court has dismissed a claim calling for the law to be changed to force company directors to start taking creditors into account at the first risk of insolvency.
The ruling clarifies the current legal position under which directors’ duties to creditors are triggered only when a company is either insolvent or on the brink of bankruptcy, rather than when the first signs of insolvency risks appear. “
As before, directors need to heed the shadow of insolvency only when it becomes more likely than not,” commercial barrister David Drake said. However, Drake noted the court’s ruling may come as a “bitter pill” for creditors “who feel that directors have been given a licence to fritter away assets, ignoring an obvious risk of creditors being left short-changed.”
Edward Smith, a partner in Travers Smith’s restructuring and insolvency practice, said: “The Supreme Court judgment recognises that there may be a sliding scale of distress, where the more parlous the financial state of the company, the more the directors should prioritise the interests of creditors.”
Britain’s services sector comes to a standstill
The S&P Global UK Composite Purchasing Managers’ Index fell to 49.1 in September from 49.6 in August, the lowest reading since January 2021. The PMI for the services sector fell to 50.0 from 50.9 in August, signifying stagnation but still better than the flash reading of 49.2. “Service sector businesses trimmed their growth expectations to the lowest seen for nearly two-and-a-half years in September, which survey respondents linked to concerns about falling disposable income and the unfavourable global economic outlook,” said Tim Moore, economics director at S&P Global Market Intelligence. Martin Beck, chief economic advisor to the EY Item Club, said: “The outlook is downbeat, given that the full force of headwinds from elevated inflation, higher interest rates and cost pressures from sterling’s softness have yet to be fully realised.”
Cap on energy bills expected to cost £89bn
Analysis from Cornwall Insight estimates that Liz Truss’s intervention to freeze energy prices for households for two years will cost the government £89bn. Under the plan, the average annual bill for a typical household would be capped at £2,500 to protect consumers from the worsening cost of living crisis and a scheduled 80% rise in the cap to £3,549. However, the cost of the policy is dependent on the wholesale cost of gas. A worse-case scenario – with rising demand and further geopolitical instability – would see the cost of the policy rocket to £140bn The best-case outcome would see the policy cost £72bn while the £89bn figure is the base case scenario.
Small businesses sound the alarm over surging UK interest rates
With a backdrop of near-record levels of debt following the pandemic, small businesses are warning that rising rates will leave many firms vulnerable in the Financial Times
Oil
OPEC+ ministers announced they had recommended a cut to the group’s output limits of 2 million barrels day (the largest reduction since 2020 and 2% of global production) as they seek to stop the slide in oil price. The US governemnt called the decision “shortsighted” and accused OPEC+ of “aligning with Russia”. Oil Prices stabilised near three-week highs this morning. Meanwhile analysts are warning Russia could cut its oil production by as much as 3 million barrels per day if the European Union and US proceed with a plan to cap prices.
Markets
The rebound in global stocks and also in Sterling appeared to lose steam yesterday. US markets traded lower on Wednesday as Wall Street failed to hold on to the sharp gains from Monday and Tuesday. Overnight, the DOW dropped -0.14%, the S&P 500 dropped -0.20% and the NASDAQ dropped -0.25%. US equity markets appear to have accepted their will be a recession, taming inflation, but then they are anticipating a rescue in the by central banks not far behind
Shell
Shell said its third-quarter profits would be pressured by a near halving of oil refining margins, crumbling chemical margins and weaker natural gas trading. indicative refining margins dropped to $15 a barrel compared with $28 a barrel in the previous three months, Shell said in an update ahead of its results on October 27, amid growing concerns over a global economic slowdown.
Diageo
Diageo said financial 2023 has started well, with organic net sales growth across all regions, but noted headwinds. “We expect the operating environment to remain challenging with ongoing volatility due to geopolitical uncertainty, a weakening of consumer spending power, inflationary pressures and disruption related to Covid-19,” said CEO Ivan Menezes. He said the alcoholic beverage company is “well-positioned” to deliver on medium-term guidance for financial 2023 to financial 2025.
UK IPOs fall sharply as companies await stability
Only eight initial public offerings took place on the London Stock Exchange between July and September, a decline of 76% on the same period last year, according to new research from EY. The eight IPOs raised just £565m – 86% down on last year’s performance. The figures put the UK stock market on course for its worst year in a decade and add to fears that the Square Mile is continuing to fall behind cities such as New York, Shanghai and even Amsterdam in attracting new listings. EY’s Scott McCubbin said: “While the overall IPO outlook for the remainder of 2022 remains subdued, companies who may have paused their IPO are now re-evaluating those plans to ensure they can adapt to the new macroeconomic landscape and are ready for the recovery in 2023.”
Average mortgage rate now exceeds 6%
The average rate on a two-year fixed-rate mortgage has now reached 6.07%, according to Moneyfacts, the first time the average rate has breached the 6% mark since November 2008. Turmoil in the markets following the Government’s mini-Budget saw lenders withdraw a record number of deals, but some banks and building societies are now slowly returning products to market, albeit with prices that incorporate much higher interest rate forecasts. Banks have also been increasing the interest rate “stress test” they apply to borrowers to see if they can afford mortgage repayments. Meanwhile, bosses from Barclays, NatWest and Lloyds Banking Group are expected to attend a meeting with Chancellor Kwasi Kwarteng today during which mortgage lending will be discussed. One source told the FT that other topics likely to be discussed include the potential removal of interest that is paid to lenders when they hold money on reserve at the central bank. Separately, a note from Moody’s points to the UK real estate market as one of the most vulnerable in Europe to a sizeable correction with British banks the fifth most exposed to residential mortgages. However, UK lenders “would be able to weather the effects of a hypothetical sharp house price decline,” Moody’s added.
Agents expect 10% drop in property prices
House prices are expected to fall by as much as 10% over the next two years, according to Knight Frank. The firm’s head of residential research, Tom Bill, has revised down growth estimates and now expects a 5% fall in 2023 and 2024, taking them “back to the same level as last summer”. However, prices should recover to a five year net rise of 1.5% by 2026. Andrew Wishart, senior property economist at Capital Economics, now expects a fall of 12%, having previously estimated a 7% drop. “A large rise in mortgage arrears and repossessions is probably unavoidable,” he told the Times.
Interest rate rises risk savings tax bill
Rising interest rates could see higher earners exceed their annual personal savings allowance for the first time. A higher-rate taxpayer would need to have only £11,900 in a one-year fixed bond paying today’s top rate of 4.2% before breaching their personal savings allowance of £500 and having to pay tax on the interest, according to calculations by wealth manager Quilter. Last year, the same taxpayer could save £33,100 in a bond paying 1.51%, the top rate at the time, without being taxed. Shaun Moore of Quilter warned that with the Bank Rate expected to continue on its upward trajectory, the likelihood of getting taxed will become a growing risk for savers.
Frozen thresholds mean income taxes will rise by £21bn
Fresh research from the Institute for Fiscal Studies (IFS) reveals that the typical basic rate taxpayer will pay an extra £500 in income tax and National Insurance per year by 2026 despite Liz Truss’s “tax-cutting” mini-Budget. Higher rate earners are facing a £3,000 annual increase. The rises are the result of the decision by Chancellor Kwasi Kwarteng to freeze tax thresholds, which will deliver an extra £41bn to the Exchequer by 2026 amid high inflation and rising wages. Meanwhile, his cuts to personal taxes will be worth only £20bn. The share of adults paying income tax will jump from 63% now to 66% within three years, the IFS said, while an all-time high of 14% will pay the higher rate of income tax, an extra 1.6m people. Tom Waters, economist at the IFS, urged the Government to “kick the habit” of freezing tax thresholds, warning it “smacks of lazy policymaking”.
EU adds more islands to tax haven blacklist
The European Union has added the Bahamas and the Turks and Caicos Islands to its tax haven blacklist and also put Anguilla back on the list as a “non-cooperative jurisdiction,” a year after it was removed. The EU said the additions were made largely due to “concerns that these three jurisdictions, which all have a zero or nominal-only rate of corporate income tax, are attracting profits without real economic activity.” Twelve “jurisdictions” are now considered non-cooperative by the EU: American Samoa, Anguilla, the Bahamas, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, the Turks and Caicos Islands, the US Virgin Islands and Vanuatu. Anti-poverty charity Oxfam has been angered by Bermuda’s removal from from the list. “How can anyone give this list any credibility? Bermuda is one of the world’s worst tax havens with its zero corporate tax rate. Yet, the EU took it off the list after it made a few woolly promises to reform,” Chiara Putaturo, Oxfam EU’s tax expert, said, adding “To add insult to injury, major European tax havens like Luxembourg are not on the list because all EU countries receive an automatic free pass.” EU member countries are not screened for possible inclusion on the blacklist.
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The Credit Protection Association – Prompting Punctual Payments – Ethical, Effective, Efficient, Economical collections.