Late payment in commercial transactions

On July 17, 1997, the European Commission published a report on late payments in commercial transactions which critically established that heavy administrative and financial burdens are placed on businesses, particularly small and medium-sized enterprises (SMEs), as a result of excessive payment periods and late payment.

This report also refered to late payment as the major cause of insolvencies, threatening the survival of businesses and resulting in numerous job losses.

It was found that in some EU member states contractual payment periods differ significantly from the EU average. The same report cited that differences between payment rules and practices constitute an obstacle to the proper functioning of the internal market by limiting commercial transactions between member states. Although Malta was not an EU member at the time, Maltese businesses, SMEs in particular, suffer from the same difficulty of late payment.

The Malta Association of Credit Management (MACM), representing trade creditors from all sectors of the Maltese economy, including a large number of SMEs, maintains a database of its members' overdue accounts, which shows a substantial amount of late payments, some of which run into hundreds of thousands of liri, all reported by the MACM members themselves.

The law courts also indicate the magnitude of this problem in the Maltese economy. Last year more than 4,100 cases were filed in the Civil Courts, consisting of the Small Claims Tribunal, the Courts of Magistrates (Civil), and the Civil Court, First Hall.

Nearly 3,000 of these cases were related to non-payment, representing claims of more than Lm10.5 million. This information, together with information pertaining to court warrants, are collated by MACM and are made available to its members daily.

To combat late payment in commercial transactions, following the report of the EU Commission (1997) referred to earlier, EU Directive 2000/35/EC came into force on August 8, 2002.

The purpose of this directive is to address the difficulties faced by businesses, especially SMEs, as a result of late payments, by giving them the statutory right to claim interest on commercial late payment and reasonable compensation for relevant recovery costs.

This directive supports the aim of the EU Commission to improve payment periods across EU member states. It is also compulsory to all the states, and each state has to implement it as closely as possible, and no room for interpretation is allowed. Therefore, it should regulate all cross-boarder commercial transactions irrespective of whether they are carried out between private or public undertakings.

The EU Directive 2000/35/EC covers two key areas:

¤ it imposes a penalty interest, which starts automatically in the event of payment delay at an interest rate of 7% above the set European Central Bank rate, and for members outside the Eurozone, as in Malta's case, a rate equivalent to that of the ECB is fixed by their own central banks; and

¤ in accordance with this directive, member states must also ensure that "an enforceable title (court order or judgment) for unchallenged claims would be obtained within 90 days from when the legal proceedings are instituted in court". This would help to speed up the payment recovery.

During its EU accession negotiations Malta did not negotiate any derogations or transitional periods to transpose this directive into Maltese law, and is therefore bound to amend its current law to reflect the EU directive.

However, eight months have passed since Malta joined the EU and the Business Promotion Act dealing with "Provisions Regarding Late Payment In Commercial Transactions" has not been amended yet.

Maltese trade creditors surely need the protection that this directive offers and rightly ask why the Maltese government has failed to transpose this directive into Maltese law.

Can Maltese businesses afford not having such a directive in force? Every stakeholder, including the local authorities, are well aware of the fact that the local commercial scene is marred by late payments and cash flow difficulties. So what is holding back the introduction of this directive?

Josef Busuttil is administrator of the Malta Association of Credit Management.