30-day late payment deadline on all commercial transactions in the EU.

Member State representatives have negotiated and recently agreed to put forward for the Parliament’s approval a proposal amending the EU directive on late payment. The directive includes a proposal for a 30-day payment deadline on all commercial transactions. The Parliament voted and approved the proposed amendments on 21 October 2010.

Background

The Late Payment Directive(1) adopted in June 2000 sought to combat late payment in both business to business (“B2B”) commercial transactions as well as in commercial transactions between businesses and public bodies.

The directive includes essential provisions on interest for late payment, retention of title and recovery procedures for unchallenged claims and provides a basic framework for combating late payment.

Despite the adoption of the Late Payment Directive late payment has, however, remained a big problem within the EU in both B2B transactions and in transactions involving public bodies. Particularly in respect of public bodies, the lack of harmonised regulation of the length of contractual payment periods is said to have caused some Member States having very long contractual payment periods in transactions involving public authorities(2). This has been seen to cause cash flow issues particularly for Small & Medium Sized enterprises (“SME”s) delivering goods and services to public bodies. Given the current difficult economic business climate and restricted availability of financial funding parties are increasingly seeking to delay payments as a way to manage cash-flow.

It was concluded that the current directive lacked effective and efficient remedies. Despite entitlement to recover interest many SMEs refrained from recovering interest. Reasons may well be commercial, however, such practice is unlikely to encourage timely payment practices. On the other hand, businesses are likely to find that the administrative costs associated with chasing clients and charging interest adds to the burden felt particularly by SMEs.

Late payment was one of the issues debated and steps to improve the situation were taken as part of the Commission’s initiatives under the European Small Business Act(3). This led to a revised proposal amending and recasting the Late Payment Directive(4) which was put forward by the Commission in April 2009.

The Small Business Act is a European initiative aimed at improving conditions for SMEs(5) in Europe and remove red tape which is the cause of much frustration to SMEs. It includes a plan to develop a legal framework to facilitate timely payment for SMEs in commercial transactions. The proposed changes may be welcome by European SMEs. One main concern for businesses is, however, likely to be the rate with which Member States actually implement the new directive as without such the directive will not have the desired effect soon enough.

On the other hand, SMEs in some countries are already benefitting from tightened payment legislation as some Member States have in fact already at their own initiative implemented legislation mirroring the Commission’s first proposal and have in many cases introduced legislation providing an even harder line than the Commission’s proposal. One example is the UKs introduction of a 10-day payment deadline for public sector payments. Whether this initiative will be repealed following the the proposal’s adoption in October 2010 remains to be seen.

On the other hand, surveys by the Forum of Private Business have shown that just 44% of invoices have been paid within the 10-day deadline, and less than a third of those to the NHS(6). In practice, reverting to a 30-day deadline may just serve to put payments in line with actual payment practices.

30-day payment deadline agreed

Following negotiations between the European Parliament and the Council, both institutions agreed on 13 September 2010 on some key aspects regarding the new legislation to update the Late Payments Directive.

The Member State representatives agreed to amend the proposal in accordance with the proposal by the EP Internal Market Committee for an EU-wide 30-day standard deadline for both public and private sectors to pay a bill for goods or services.

The Commission’s initial proposal stated that “Payments shall not exceed 60 days unless otherwise expressly agreed between the debtor and the creditor, and provided it is not grossly unfair to the creditor”. Parliament negotiators were concerned about leaving the issue of deadline open for the debtor and the creditor to agree as this would subject SMEs to the bargaining powers of larger contractors who could take advantage of this loophole.

“I am extremely pleased that the Parliament achieved this general 30-day deadline for both public authorities and business-to-business transactions”, said Parliament’s reporter and chief negotiator Barbara Weiler (S&D, DE), adding that “Parliament has secured a level playing field and clear-cut rules for all players, to the benefit of Europe’s many small and medium-sized companies. This deal means that SMEs will no longer be forced to serve as banks for public enterprises or big companies.” (7)

In addition to agreeing to the introduction of a standard 30 day deadline for both public authorities and B2B transactions, the negotiators reached agreement on the following key amendments to the Late Payment Directive:

Key elements on late payments agreement(8)
  • 60 days capping for public authorities: Only in exceptional circumstances can the payment period be longer than 30 days. However, Parliament fought hard to ensure that payment can never be delayed beyond 60 days for public bodies and that special justification is necessary for any extension of the payment period.
  • Interest rate and compensation: The statutory interest rate payable if a payment is late will be a reference rate plus 8%. MEPs initially pushed for a 9% interest charge. The 8% surcharge is a compromise with the Council, which wanted 7%.

Parliament and Council agreed to a fixed sum of 40 Euro as compensation for recovery costs taking out the initial proposal by the Commission of a multi-level compensation payment system which may have been considered confusing and complicated.

  • For public entities providing healthcare: Member States may choose a deadline of up to 60 days. This is because of the special nature of bodies such as public hospitals, which are largely funded through reimbursements under social security systems.
  • A clear-cut verification period: The verification period for ascertaining that the goods or services comply with the contract terms is set at 30 days. This period may be extended only if expressly agreed and provided it is not grossly unfair to the creditor. Parliament secured an undertaking that verification periods may not be used as a loophole to delay payment unnecessarily.

The proposal was put to a plenary vote at the Parliament on 21 October 2010 in Strasbourg and was approved . The recast directive is now to be formally adopted by the Council and will enter into force 20 days after publication after which the Member States will have 2 years to implement the directive.

It is anticipated that the new rules will ensure that SMEs no longer face financial problems due to the late payment of bills by public bodies or large business partners.

Conclusion

Although the amendments serve to clarify the legal position and on the face of it introduce firm and efficient remedies such as the fixed 30 day limit, a fixed recovery fee as well as a statutory interest charge of the reference rate plus 8% on the amount owing it remains to be seen whether the amended directive will in fact serve to dramatically improve payment practices.

It is a matter of fact that businesses operate in a commercial environment and will continue to make commercial decisions. Despite having clearly defined legal rights, businesses are likely to although reluctantly continue to accept late payments from their business partners and only resort to making full use of the available remedies when business relationships are irreparably damaged usually due to repeated payment issues and lack of communication.

The vision behind the directive is clear and seeks to address the issues and attempts to throw a lifeline to SMEs in order to increase their cash-flow and will perhaps serve as a role model to operators involved in commercial transactions. However, it is difficult to see how this initiative will serve to ensure increased cash-flow for SMEs without mandatory imposing of the remedies which in any event would be unsuitable in a commercial environment.

On the other hand, the directive is perhaps more likely to successfully aide timely payment by public authorities as payment in this sector can be driven by policy and are not strictly commercially driven. It also serves in providing harmonised late payment legislation ensuring transparency in cross-border transactions and therefore provides desired clarity and transparency.

The material contained in this guide is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

© , March 2013

(1) Directive 200/35/EC of the European Parliament and of the Council of 29 June 2000 – Official Journal L200/35

(2) COM(2009) 126 final

(3) The Small Business Act is a set of 10 principles designed to guide the conception and implementation of policies both at EU and national level. The aim is to create a level playing field for SMEs throughout the EU and improve the administrative and legal environment to allow these enterprises to release their full potential to create jobs and growth (source: http://ec.europa.eu/enterprise/policies/sme/small-business-act/)

(4)http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32000L0035:EN:NOT (Directive 2000/35). The wording of the proposal was at the time of writing this article not yet publicly available.

(5) SME are categorised as businesses with up to 250 employees and a maximum of €50 million turnover – this encompasses 99% of European businesses and ¾ of all private sector jobs.

(6) http://www.managementtoday.co.uk/news/1029101/good-news-bad-news-eu-imposes-30-day-payment-terms/

(7) Press release: http://www.europarl.europa.eu/sides/getDoc.do?language=EN&type=IM-PRESS&reference=20100913IPR82069

(8) http://euroalert.net/en/news.aspx?idn=10523

(9) http://euroalert.net/en/news.aspx?idn=10831

Please contact:

Steen Rosenfalck

DD +44 (0)20 7553 9931

View profile »