Late Payers Beware!

The Late Payments Directive 2002, which will permit businesses to automatically claim interest on "late payments" where an invoice is not paid on the due date, was due to come into effect across the EU on the 7th August 2002. The Directive states that payment of an invoice is deemed to be late if it is not paid within 30 days of the receipt of the invoice, or the goods, the service, or the specified contract payment date. Suppliers will be entitled to interest on late payments at the rate of 7% per annum above the European Central Bank main refinancing rate, which is currently 10.25% per annum.

The Tánaiste and Minister for Enterprise Trade and Employment, Mary Harney enacted new legislation incorporating this Directive into Irish Law on the 26th July 2002 to have effect from the 7th August 2002. SI No. 388 of 2002 entitled the "European Communities (Late Payment of Commercial Transactions) Regulations 2002" the Regulations amends the provisions of the Prompt Payments of Accounts Act 1997.

Up to now the existing legislation only dealt with interest on late payments by Public Bodies. Suppliers of goods or services to Public Bodies could claim interest on invoices where they remained outstanding after 45 days and interest could not be waived. The Regulations will repeal Sections 4 to 11 of this Act. Irish businesses will now be entitled to charge interest to their late payers in respect supplies of goods or services contracted for on or after the 8th of August 2002.

Contracting parties have the freedom to negotiate the payment terms of their contract. That said, commercial recipients of goods and services should be aware that they should not seek to impose unfair payment terms as the Courts will not uphold any term that is grossly unfair. The Regulations also permit a representative body or a supplier to make an application to Court for an order stating that particular terms are grossly unfair and unenforceable. The Courts can also prohibit the use of such terms in future contracts.

The EU Commission conducted a number of studies into the effect of late payments on business in general but in particular with regard to Small to Medium sized Enterprises ("SME's).

This study established the following:

• 450,000 jobs are lost each year throughout the EU as a direct result of late payment of invoices. This equates to approximately one quarter of the labour force in Ireland.
• Approximately one in four insolvencies throughout the EU are as a direct result of late payment of invoices resulting in losses of €23.6 billion annually.
• In only 7% of the cases of late payment of invoices, is there a genuine dispute relating to the supply of the goods or services.
• The principle reason for the late payment of invoices is deliberate withholding of payment.

Across the EU there are differing attitudes towards the payment of invoices on time. According to the International European Business Survey, Grant Thornton International 2001 it appears that businesses in the Northern EU States have a better record of paying on time (e.g. Sweden's average payment date is 36 days) whereas businesses in the Southern EU States display a distinct lack of enthusiasm for paying invoices when they come due (e.g. Greece's average payment date is 88 days). The Directive will hopefully encourage the EU's late payers to reassess their late payment practices or otherwise face the consequence of costly interest charges of the overdue amounts.

The Regulations should help tackle one of the major issues facing Irish SME's by speeding up the payment for goods or services supplied on time. Late payment of invoices is a constant headache for businesses and can have disastrous consequences up to and including closure.

The Directive also requires each member state to ensure that their existing Court procedure allows a creditor to recover an undisputed debt within 90 days. The current court rules in Ireland have provisions which comply with this requirement, but due to the delays that presently exist in the court system it is not likely that a creditor will recover the debt within the 90 days due to this current backlog.

The EU Commission hopes that the introduction of this Directive will relieve some of the pressures SME's experience in managing their cash flow effectively and allow them to concentrate on developing their core businesses. One of the main reasons cited by Irish businesses for not getting involved in trade with other Countries within the EU is the fear of either not being paid or not receiving payment for an extended period of time. The EU Commission hopes that trade between European SME's will increase thanks to Directive.

Time will tell.

For further information or general enquires please contact
Kevin O'Brien
E-mail: kobrien@kilroys.ie or
Kevin O'Gara
E-mail: kogara@kilroys.ie
Telephone: +353-1-4395600
Fax: +353-1-4395601/4395602

© Kilroys Solicitors 2002