Financial Resource

It now seems highly likely that a new Directive dealing with the late payment of commercial debts will shortly be approved.  It has already got the green light from The European Parliament.

As a new Directive, it will replace the existing Late Payments Directive of 2000, and will seek to bring about a “decisive shift to a culture of prompt payment” within the European Union.

Its primary purpose is to create more confidence and afford more protection to hard stung creditors who are out there in the marketplace providing products and services and are not being paid on time and many not even being paid at all due to the increasing prevalence of insolvency, liquidation, examinership receivership and bankruptcy.

The proposed new EU Directive aims to reverse the trend of late payment by penalising debtors who are late with their payments as it introduces interest rates and fixed penalties for those who don’t comply. Debtors will be under a strict requirement to make payment within certain time frames and this proposed new law will entitle the supplier or creditor to charge interest for late payment without further paperwork or other written notices.

Companies or individuals who are late paying their debts will be liable for a fixed fee and also responsible for the costs of the recovery of the debt. The directive sets a minimum fee of €40 but this can be increased depending on the size of the debt.

But not all State Bodies in Ireland are renowned for paying their debts on time and this new Directive acknowledges the role of State Bodies as being in a much stronger position in commercial contracts and accordingly, in transactions where a public body is the debtor, the payment period cannot exceed 30 days, unless it is expressly agreed in writing, and then, the period can be extended to a maximum of 60 days.

THE LATE PAYMENTS REGULATIONS 2000

This is an EU wide law that came into effect here on 7 Aug 2002 to combat late payments in business transactions.  It seeks to promote a better culture of prompt payment of bills.  The law is dealt with by way of regulations, the European Communities (Late Payments in Commercial Transactions) Regulations, 2002.

These regulations provided that penalty interest will become payable in business transactions if payment is not made within 30 days, unless an alternative payment period is specified in an agreed contract.

The interest rate chargeable for late payment is the relevant ECB main refinancing race on 1st January or 1st July of each year, currently 1.00 percent plus 7%, unless otherwise agreed.

BACKGROUND

The Prompt Payment of Accounts Act, 1997 was introduced here following a report from the Task Force on Small Business which recommended that legislation should be introduced to secure prompt payment by public sector organisations, the 1997 Act requires public sector organisations to pay their bills on time or else they become liable to their customers for penalty interest.  Accordingly this Act substantially improved payment times in the public sector.  Now these new 2002 regulations are designed to promote a better culture of prompt payment between businesses in Ireland.

Whilst the statistics are a little out of date, there are significant differences between EU member states as regards payment periods and when payment is actually made.  They vary on average from as low as 27 days to a high of 94 days and more.  The average is 53 and in Ireland it is just below at 51.  Again these figures are averaged and it is considered that they have not changed significantly.

HOW THE REGULATIONS WILL OPERATE

The regulations will apply to both business transactions in the public and private sectors.  However, there are some exceptions.  These are:

•           The debts that are subject to other legislation such as winding up proceeding proceedings following on from an insolvent situation

•           The claims for interest is less than €5

•           Transactions with consumers, non-business customers

Contracts that were agreed before 8 Aug 2002

PAYMENT PERIOD

The regulations provided that interest shall be payable in respect of the late payment.  A payment will be regarded as being late when 30 days have elapsed, unless an alternative payment arrangement is specified in an agreed contract between the parties.  The 30 days mandatory payment period begins either on:

a)         the date of receipt by the purchaser of an invoice for payment or

b)         The date of receipt of the goods or services where;

1)         The days of receipt of the invoice is uncertain or

2)         The purchaser receives the invoice to be for the delivery of goods or services in question.

In cases where the parties have agreed a procedure for acceptance or verification of the goods, it starts after this process has been completed.

The interest will continue to be payable until the debt is paid, without the necessity of a written warning or reminder

RATE OF INTEREST

The interest race will be the European Central Bank refinancing rate plus 7 percentage points.  Parties to a contract may agree an alternative interest rate.  The ECB rates in force on 1st January and 1st July apply for the following six months in each year.  Only one rate will apply to a late payment, that is the race in force on the payment date.

The EU Directive

The Commission proposed a Directive in March 1998. The economic rationale behind the Commission’s proposal lies in the fact that one out of four insolvencies is due to late payment. This leads to the loss of 450 000 jobs each year, adding to the high level of unemployment in Europe. In addition, outstanding debts worth € 23.6 billion are lost every year through the insolvencies caused by late payment.

When Will the new 2010 Directive Take Effect?

Whilst this new EU Directive is to be welcomed, anything that can focus on debtor’s  paying their debts on time can only help these businesses waiting to get paid but it seems that whilst this new law will likely be adopted in the coming weeks, the  27 Member States will have until early 2013 to transpose these provisions into domestic law. We need this new law today and 2013 is just too late!

Brian Walker

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