Late Payment Legislation and Recent Developments
16 April 2013
Since the enactment of the Late Payment of Commercial Debts (Interest) Act 1998 there has been legislation in place to provide creditors with a financial recourse where payment from their customers has become overdue.
Any business person will know that cash is the lifeblood their organisation and the justification for such legislation is very simple – late payment affects the liquidity of the supplier, thereby complicating the management of their undertakings and placing a burden on them to force the debtor to fulfil their end of the bargain. It is an all too common scenario for a business to delay payment to one of their suppliers because their own debtors have neglected to make prompt payment.
Once a supplier has grown tired of false promises of payment and endless excuses they will instruct a solicitor to commence legal proceedings with the hope that payment will be forthcoming after this initial pressure. The supplier will have to bear the cost of this assistance and it is therefore only reasonable that they are entitled to a form of compensation for resources wasted.
Implementing this legislation is particularly useful at the Statutory Demand stage as the creditor cannot lawfully claim the cost of preparing and serving this document. The 1998 Act comes in and allows the supplier to claim interest on the overdue sum thereby going some of the way to compensate them for the cost incurred in securing payment.
Many suppliers will have contractual interest in their Terms and Conditions however the legislation covers the scenario where no terms have been agreed. Essentially the Act provides for two types of remedy: interest and compensation.
Interest can be applied to each outstanding invoice from the date payment became overdue to the date of calculation. Where terms of payment have been agreed the commencement date for calculating interest will be the date after which payment had been agreed to be paid. In the absence of an agreed date interest will accrue from 30 days after receipt of the goods/services OR invoice for the goods/services – whichever is later.
Late payment interest is applied at the rate of 8% over the current Bank of England base interest rate. In times of relative economic stability this can fluctuate and therefore creditors will have to be careful to apply the correct interest rate for the relevant periods, however the base interest rate was lowered by the Bank of England to 0.5% in July 2009 and has not been changed since.
The second and less understood element of the legislation is the compensation fees. Under the legislation (amended and supplemented by the Late Payment of Interest Regulations 2002) creditors are entitled to claim a fee for overdue invoices on the following scale: £40 for invoices up to £1,000; £70 for invoices of up to £10,000 and £100 for invoices over £10,000.
It is worth pointing out that these fees can be claimed for each individual invoice and not the final balance outstanding. In most cases a business will not pursue legal avenues until several invoices are outstanding or a small number of significant invoices are outstanding. What this means in practice is the creditor can potentially claim several hundreds of pounds in late payment fees alone where the purchaser has been provided with goods or services on account in different instances and has built up a long list of outstanding invoices. Of course imposing these fees is not compulsory and it is very much at the creditor’s discretion however they can significantly strengthen the bargaining hand in securing payment.
Whilst the legislation currently provides the supplier with a significant relief in non-payment situations the position would appear to have improved somewhat with the enactment of the Late Payment of Commercial Debts Regulations 2013 which came into force in March 2013. The purpose of this enactment was to implement the changes required by the EU Late Payment Directive of 2011 although it should be noted that the UK was a trend-setter in late payment legislation being one of the first Member States to enact such laws.
The 2013 Regulations provide that where the parties have not agreed a payment period for invoices interest begins to accrue after thirty days from the later of:
a) Receipt of the supplier’s goods/services;
b) Receipt of the supplier’s invoice;
c) Verification/acceptance of the goods/services (provided the contract or a relevant statute provides for such verification/acceptance.)
More significant changes have been made to scenarios where payment terms have been agreed between the parties. In such circumstances, interest will begin to accrue on invoices issued to public authorities in the above-mentioned terms. For private businesses however the limit is greater – businesses can agree payment terms of any length however in the event that the terms are thirty days over the above terms (in other words, more than sixty days) the supplier will have to be able to demonstrate that such period is not ‘grossly unfair.’
Given that this is new legislation there is no jurisprudence as to how the term ‘grossly unfair’ might be interpreted by the courts. Having said that the Regulation provides that all circumstances of the case are to be taken into account, including:
a) Whether the terms are a gross deviation from good commercial practice and contrary to good faith and fair dealing;
b) The nature of the goods and services supplied; and
c) Whether the purchaser has an objective reason for requiring a change from the statutory provisions.
The rates of interest and compensation fees remain the same as under the 2002 Regulations however the 2013 Regulations have introduced a new provision in relation to compensation which states that in the event that the costs of the supplier are not met by the compensation fee the supplier shall be entitled to a sum equivalent to the shortfall. It appears that if this provision is imposed by the supplier then it will be used retrospectively, i.e. the supplier will recover the debt together with any interest and fees applicable and if he discovers a shortfall in his costs of recovery then he will now be entitled under this legislation to recover this sum. A similar provision can be found in many leases and the landlord will usually add the cost of recovering balances due to the tenant's continuing liabilities.
These regulations will welcomed by suppliers in what is already a supplier-friendly environment in this regard. The expansion of the legislation to cover contracts between small businesses (as provided for in the 2002 regulations) provides an adequate protection to small enterprises who do not have the luxury of a large or varied client base and who may be dependent on customers who make orders at leisure but who make payment on their own imposed terms.
What is prominent about late payment interest and fees is that many businesses, particularly smaller businesses, do not know that they are entitled to it and it is important that they are made aware of these rights in order for the laws to be effective. Having said that good business practice can often mean waiving such entitlements, particularly where there has been a long-established link with the purchaser and the diminishing of such relationship would result in the loss of a consistent customer.
Ultimately there can be no substitute for an effective and organised credit control system which ensures that problems are not caused by overdue payments. The challenge for businesses in an already difficult environment is to strike the correct balance between providing favourable terms to the customer whilst maintaining a stream of liquidity into the business.