Commercial finance
- Late payment of debts: Directive 2011/7/EU
- Early implementation and the benefits for businesses
- What are the benefits of the Directive for ABLs?
Late payment of debts: Directive 2011/7/EU on combating late payment in commercial transactions (Directive)
Almost 10 years after its introduction, the Late Payment of Commercial Debts Regulations 2002 has not resolved the problem of companies not paying their suppliers of goods and services within the contractual payment period. The problem may even be getting worse as companies delay paying their debts as a means of improving their own cash flow and providing them with cheap credit.
In recognition of this continued problem the EU published the Directive in March 2011. Member States are required to update and replace the existing law on late payments their national law by 16 March 2013. In September 2011, UK Government announced that it proposed to accelerate implementation of the Directive to bring it into force in the first half of 2012.
The Directive does not outlaw the practice of not paying debts within any contractual period for payment, but instead aims to incentivise prompt payment by penalising companies who pay late. The key features of the Directive are:
- A creditor will be entitled to interest on unpaid debts where he has performed his contractual obligations but not received payment by the due time, due to the fault of the debtor.
- For contracts that do not specify a payment period, the Directive provides that the supplier will be entitled to interest for late payment after 30 days of the date of receipt of the supplier’s invoice or the date of receipt of the goods or services or the date of expiry of a period for verification or acceptance of the goods.
- It applies equally to business to business or business to public authority transactions.
- It is open to parties to agree a longer payment period in their contract. In business to business transactions this can be up to 60 days, or a longer period if expressly agreed by both parties which is not “grossly unfair” to the supplier. There will be a presumption that payment periods of more than 60 days will be unfair, unless clearly negotiated and justified by the circumstances. In business to public authority transactions, the Directive provides that the payment period should not exceed 30 days unless the public authority engages in certain specified activities, in which case a payment period of up to 60 days can only be agreed if it can be fairly justified in the context of the transaction.
- There will be an automatic right to charge interest on outstanding debts (the whole amount or any unpaid instalment) at a statutory rate (8%) from the day after the due date for payment. There will be no requirement for a creditor to serve a separate notice charging interest.
- Compensation costs will be automatically payable to the supplier. These costs are a fixed sum of Euro 40 to cover the supplier’s internal debt recovery expenses, together with the right to charge the reasonable costs of instructing solicitors or external debt recovery agents.
- It will not be possible to contract out of an obligation to pay interest for late payment or compensation for recovery costs. Any clause which purports to do this will be treated as unenforceable and may give rise to a claim for damages in favour of the creditor if grossly unfair.
Early implementation and the benefits for businesses
It is unknown whether the Government will exercise the option in the Directive to apply it to contracts entered into before 16 March 2013. If they did, this would enable businesses to benefit from the enhanced rights against slow paying customers immediately from implementation and in respect of an increased number of contracts.
The deemed 30 day payment period will benefit those businesses that still supply goods and services without any formal conditions governing payment or who currently have the purchaser’s longer payment terms imposed on them reducing the inequality of bargaining positions. The principle of freedom of contract is not to be used to the disadvantage of a creditor. The Directive will introduce certainty into a supplier’s terms of business and eliminate the primary defence to a claim for payment: that the sum demanded is not due. The automatic right to interest on unpaid debts immediately from the expiry of the payment period means a business need not go to the cost of making a formal demand, or risk being penalised by not being able to charge interest until such a demand is made. back to top
What are the benefits of the Directive for ABLs?
Dealing as they do with the debts created by their customers, ABLs will welcome any steps to accelerate payment by those customers of goods and services supplied to them by an ABL’s client as it will reduce the period of the ABL’s exposure to their clients’ outstanding invoices.
Apart from the general cash flow benefit of an acceleration of payment of debts, the Directive may provide other significant benefits to ABLs through the assignment in their favour of ‘related rights’ included in their purchase of debts from suppliers. The Directive creates an automatic right for creditors to charge interest for late payment whether or not the sale contract expressly makes provision for it. This right to charge interest, and at a rate significantly higher than generally provided in a sale contract, will therefore be included in the ‘related rights’ passing to the ABL. If any debt assigned to an ABL is not paid by the end of the payment period, whether that period is established by a fair contract term or determined in accordance with the Directive, the ABL will be able to charge interest automatically on the late payment at the rate of 8% over the reference rate. The ABL would receive this money as compensation for the customer’s delay in payment of the debt to it. There would be no reason for the ABL to pass this sum back to the supplier, as the supplier has received value for the debt early from the ABL.
In addition, the Directive is creating a right for suppliers to recover enforcement costs from the late payer. This is not limited to the notional Euro 40 in respect of their internal costs, but includes the reasonable costs of instructing external solicitors or a debt recovery agent to collect the late debt for them. Suppliers will particularly welcome this change; ABLs do not normally bear their enforcement costs in respect of debts they have purchased, these costs are charged to the supplier. For an ABL, the Directive will give them two possible sources of payment of their enforcement costs.
The provisions of the Directive will be mandatory once implemented into national law but ABLs may still want to consider reviewing their definitions of ‘related rights’ to ensure they expressly have the benefit of the enhanced right to interest for late payments and the right to claim against the creditor for debt recovery costs to be introduced by the Directive. back to top