Many payments in commercial transactions between businesses or between businesses and public authorities are made late after delivery and, often, later than agreed or stipulated by the supplier. These practices impinge on liquid assets and complicate the financial management of enterprises. Late payments affect the competitiveness of companies, especially small- and medium-sized ones. Indeed, payment delays can be responsible for bankruptcies of otherwise viable businesses. This risk strongly increases in periods of economic downturn.

In a sale transaction, most goods and services are normally supplied on a deferred payment basis, whereby the supplier grants the customer time to pay. This time period is generally set out in the supplier's invoice or else laid down by law. At the end of this period, the supplier expects payment for the goods delivered or services rendered.

Payment made after this period constitutes late payment. The Late Payments Directive of 2000 was adopted to combat late payment in such commercial transactions by stipulating, amongst others, a statutory interest when payment is not made within the contractual or legal deadline.

Yet, it is acknowledged that there is still a general problem within the EU. To put the situation in check, the European

Commission recently adopted a fresh proposal to combat late payments in commercial transactions by introducing new elements intended to reinforce the rights of creditors.

As regards public authorities, the Commission is proposing to give creditors means to enable them to fully and effectively exercise their rights when paid late and thus, confronting public administrations with measures that effectively discourage them from paying late. Under the proposed rules, public authorities should, as a rule, pay within 30 days, and in default fact interest, a compensation for recovery costs and a flat-rate compensation of five per cent of the amount due, which kicks in from the first day of the delay.

In any commercial transaction between undertakings, the creditor will be entitled to interest for late payment provided that the creditor has delivered the product or rendered the service in terms of its contractual and legal obligations. Interest will become payable automatically without the necessity of a reminder after the lapse of 30 days following the date of receipt by the debtor of the invoice or 30 days after the date of receipt of the goods or services.

A crucial introduction in the proposed directive is the compensation payable to the creditor in the event of late payment. When interest becomes payable, the creditor would be entitled to obtain from the debtor compensation for late payment, over and above the interest, representing the creditor's own recovery costs. The amount of compensation depends on the amount of debt due, and such compensation varies from a fixed sum of €40 for a debt less than €1,000, to a sum equivalent to one per cent for a debt of €10 000 or more. This compensation is intended to discourage debtors from paying their bills late.

These new rules will apply notwithstanding any agreement to the contrary by the supplier and the customer. Therefore, a clause in an agreement relating to the date for payment or the rate of interest for late payment or the compensation payable on late payment will, in particular circumstances, be considered as an unfair contractual clause if not in conformity with the directive, even if both supplier and customer would have agreed to it.

The proposed directive represents a decisive shift from the old directive on late payments, especially with the introduction of the compensation payable to creditors and the consideration of particular contractual clauses as unfair. It remains to be seen whether these new rules will reverse the current trend to effectively discourage late payments.

• Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.