Shorter limit for late payments

You are a small trader and you get a public entity as your client. You think you’ve hit it big. Until, that is, it is time for payment.

Late payments are known to constitute a major headache for businesses, especially the smaller ones. They lead to severe liquidity problems and, at times, to outright bankruptcies. And when the debtor is a large company or a public entity, a small business may also become dangerously dependent on the debtor for its very existence. It becomes difficult to continue supplying but even more perilous to stop doing so.

So what to do?

A European law on combating late payments was enacted in 2000 in order to put in place some disincentives for debtors that pay late. That law helped by starting to attack the culture, especially conspicuous in southern Europe, that it is ok to pay late. But it did not go far enough to reverse the trend. This is why today we are voting in the European Parliament to change that law by introducing tougher sanctions for the late payers.

Here is a quick look at its main elements.

Firstly, the debtor will automatically become entitled to interest unless payment is made within a maximum of 30 days. This applies to cases where no date of payment is agreed between the parties.

If a date of payment is agreed between the parties, this can obviously be shorter than 30 days but it cannot exceed a maximum of 60 days.

And, in order to ensure that enterprises remain free to conclude their own business arrangements, a measure of flexibility was retained on this time limit. But this was a particularly difficult point because it is easy to understand that small companies may often be bullied by the larger clients into accepting unreasonably long payment terms. For this reason, the new law will lay down that an agreement to extend the period beyond 60 days will only be valid if it is based on an express agreement between the two sides and if the agreement does not include clauses that are grossly unfair on the creditor. This means that if, for instance, there is a clause requiring the debtor to give up his right to interest payments, this will not be valid.

Secondly, the interest that kicks in automatically amounts to eight per cent, up from seven per cent in the original law. The European Parliament had pressed for a more dissuasive nine per cent but a compromise was reached with the Council on eight per cent.

On its part, the European Commission had proposed an additional penalty amounting to five per cent of the amount due as a lump sum penalty payment over and above the interest. But no agreement was reached on this point and it was therefore abandoned. However, agreement was reached to give the debtor an entitlement to a fixed sum of €40 as compensation for the costs of chasing payment. If a lawyer or a debt-collection agency are roped in, their costs too could be factored in.

It is important to note that no reminder is necessary for interest or recovery costs to apply. They kick in automatically.

Thirdly, the timeframe applies both when the debtor is a private company and even if it is a public entity.

Public entities are known to be laggards on timely payment. As such, the 30-day limit should be even more of a requirement in their case because they often do not have the same business constraints as private enterprise and, in their case, late payment is more avoidable.

Nevertheless, especially in the case of public entities providing health-care services, we agreed to allow for an extension for up to an absolute maximum of 60 days. There is no possibility for an agreement between the two parties to go beyond 60 days. This gives EU governments the possibility to apply a derogation that would stretch the 30-day period to 60. But no more. Countries that use this derogation will not be left unchecked. They will be required to report to the European Commission which, in turn, will keep tabs on this practice in view of a future review.

Although a 60-day period is not insignificant, it is by far shorter than the long payment periods often experienced by businesses when dealing with public entities, especially in the case of health care. This change, therefore, constitutes a major improvement of this new law.

Moreover, the derogation is not possible in the case of public authorities, which do not deal with health care, trade or industrial activities. In their case, the standard maximum of 30 days will apply – again a welcome improvement for businesses.

The new law is expected to be carried by an overwhelming majority in Parliament in today’s vote. Following our vote, the agreement will require the final endorsement in the Council of Ministers and EU countries will have up to two years to write it into their national legislation.

www.simonbusuttil.eu

Dr Busuttil is a Nationalist member of the European Parliament.