New EC Directive regarding late payments

The text of the new Directive on Late Payment in Commercial Transactions was approved in October 2010 and was published in the Official Journal of the European Union on February 2011, and came into force on the 16th March 2011. Member states, of which we are one, will have until the 16th March 2013 to implement the Directive in domestic law.

The purpose of the Directive is to encourage prompt payment of invoices as many company’s suffer with cash flow problems relating to late payment for goods and services provided.

The new Directive limits payment terms to 30 days, however if both parties agree this can be extended to 60 days. The payment period can be extended further, beyond  the 60 days, on the proviso that it is “expressly agreed” by the creditor and debtor and that it is not deemed “grossly unfair to the creditor”.

A supplier will automatically be entitled to charge interest at the statutory rate (8% above the reference rate) should a debtor default in making payment within the scale of the payment terms. In the UK the reference rate will be the base rate of the Bank of England.

If a debtor defaults, in addition to the interest added, it must also pay compensation costs to the supplier at a minimum of £40. The supplier will also be able to seek recovery of any reasonable recovery costs that it incurs over and above the £40, including for instance , any legal costs incurred in instructing solicitors or a debt collection agency.

A verification period for ensuring that the goods supplied are satisfactory is 30 days. This period again can be extended in deals involving complex contracts but only if expressly agreed by both parties.

Finally, any clause of a contract which excludes the supplier’s right to interest for late payment or compensation for recovery costs will be deemed as grossly unfair. EC states implementing the Directive are required to provide that such a clause is either unenforceable or gives rise to a claim for damages.

This is a significant change and is aimed to assist company’s to recover debts. It is believed that credit control of businesses will be easier, at the same time assist company’s who are suffering in the current financial climate, due to a lack of capital to invest in growth strategies.

Cash flow is a major factor in most business failures. Should your company be suffering to meet it’s overheads, please do not hesitate to contact us on 01257 452021 and speak to an expert in business turnaround.