8 Combating late payments
| (30554)
8969/09
+ ADDs 1-2
COM(09) 126
| Draft Directive on combating late payment in commercial transactions (recast) — Implementing the Small Business Act
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| Legal base | Article 95 EC; co-decision; QMV
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| Department | Business, Innovation and Skills
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| Basis of consideration | Minister's letters of 13 October and 30 November 2009
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| Previous Committee Report | HC 19-xviii (2008-09), chapter 4 (3 June 2009)
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| To be discussed in Council | No date set
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
8.1 Because late payments in commercial transactions affect the
competitiveness and viability of companies, particularly small
and medium sized enterprises (SMEs), the Community adopted Directive
2000/35/EC,[31] which
obliges Member States to lay down that interest[32]
must be charged when payment is not made within an agreed deadline
(or 30 days in the absence of an agreed date). It also specifies
that agreements not in line with the provisions in the Directive
may be deemed grossly unfair to the creditor, and thus either
give rise to a claim for damages or not be enforceable: and it
contains provisions governing the retention of title and recovery
procedures.
8.2 Despite this, the Commission says that late payments
are still a problem, due to a range of factors, including the
absence of effective and efficient remedies, and it has highlighted
the unjustifiably long contractual payment periods in transactions
involving public administrations. It also points out that, since
the risk of late payments increases strongly in periods of economic
downturn, the European Economic Recovery Plan[33]
stressed the need for the Community and Member States to ensure
that public authorities pay invoices within a month.
8.3 Against this background, the Commission put forward
in April 2009 this proposal to recast Directive 2000/35/EC,[34]
in order to improve the effectiveness and efficiency of the remedies
it provides for late payment. As we noted in our Report of 3 June
2009, this would largely retain the existing provisions in the
Directive, but would:
- extend the measure to include
claims for interest of less than €5;
- entitle creditors, as compensation for recovery
costs when interest becomes payable, to a payment of €40
for a debt of less than €1,000, a payment of €70 where
the debt is between €1,000 and €10,000, and a payment
equivalent to 1% of the amount concerned, where the debt is €10,000
or more;
- enable creditors to obtain as well reasonable
compensation for all remaining recovery costs;
- require public authorities to pay within 30 days,
failing which creditors would, in addition to interest for late
payment and compensation for recovery costs, be entitled to compensation
of 5% of the amount involved;
- strengthen the provisions on grossly unfair contractual
clauses by applying these automatically to contracts which exclude
interest for late payments.
8.4 In our Report, we also noted that the Government
supports the measures in the proposal (which it expected to be
considered by the Competitiveness Council towards the end of 2009),
and had highlighted the two key differences for the UK as being
the 5% compensation payable where the debtor is a public authority,
and the setting of compensation for debts of €10,000 or more
at 1% (in contrast to current UK legislation, which imposes a
flat rate figure of £100 for debts in excess of £10,000).
8.5 As it intended to provide an Impact Assessment
in due course, we decided to report the document to the House,
but to hold it under scrutiny until we received that Assessment.
However, we also commented that one of the reasons put forward
by the Commission for its proposal was the alleged reluctance
of many businesses to charge interest, even when entitled to do
so, and the view taken by some creditors that the cost of taking
action against late payment is not justified by the financial
benefits. In view of this, we suggested that the additional penalties
now proposed would be unlikely to materially alter that situation,
particularly where small businesses are supplying a much larger
enterprise, and we asked whether that was also the Government's
view.
Minister's letter of 13 October 2009
8.6 We subsequently received from the Minister for
Trade, Investment and Small Business (Lord Davies of Abersoch)
a letter of 13 October 2009, enclosing the promised Impact Assessment.
This reiterated that late payments are a key barrier to business
success within the UK, and that there is a close relationship
between these and the rate of insolvency. It also suggested that
many businesses facing late payments are unaware of their right
to interest, what rate they can charge, and how to claim; that
many debtors abuse their market power vis-à-vis their suppliers;
and that creditors incur further costs in chasing late payments,
often regarding the pace of legal proceedings as a further deterrent.
The Assessment suggested that, although there are clear costs
and benefits arising from the proposal, overall these would be
neutral, since the costs of the additional compensation due from
businesses paying late would be offset by the benefits to those
receiving such compensation —
though it suggested that this could involve an annual transfer
between the two groups of around £180 million, with by far
the greatest proportion of those benefits being felt by those
who supply the public sector.
8.7 As to the question we raised in our previous
Report, the Minister said that, whilst members of the Institute
of Directors had indicated that they would be more likely to claim
compensation under the new proposals, others believed that suppliers
will still be unwilling to invoke the provision for fear of losing
customers. However, he suggested that poor payment is not simply
an issue between small and large companies, with 27% of all money
beyond agreed terms being owed by companies with fewer than ten
staff.
8.8 When we considered this information on 4 November,
we found some of the figure-work in the Impact Assessment difficult
to follow, and we also formed the impression that the scale of
the transfer between creditors and debtors would be unaffected
by the measure proposed. In addition, we noted that 23 Member
States had expressed concerns that the proposal would introduce
more punitive measures — concerns similar to those which
had been raised in separate correspondence by the House of Lords
European Union Committee over the potentially disproportionate
impact of a 1% compensation payment in the case of large debts
where the delay in payment was only marginal. Our Chairman therefore
wrote to the Minister saying that, before we could consider clearing
the proposal, we would like to have more information, particularly
on these points.
Minister's letter of 30 November 2009
8.9 We have now received from the Minister a further
letter of 30 November, enclosing an updated Impact Assessment.
This confirms that, in the case of transactions between commercial
concerns, the new provisions would make only a very small difference
as between debtors and creditors, and that the main effect (equivalent
to just under £180 million a year) would arise where the
debtor is a public authority, due to the introduction of a 5%
flat rate compensation payment. The Minister has also sent us
a copy of the latest text of the proposal following discussions
in Brussels, which indicates that, where a debt is €10,000
or more, the earlier proposal for a 1% compensation payment for
recovery costs in the case of transactions between commercial
undertakings would be replaced by a fixed payment of €200
for debts up to €100,000, and one of €1,000 where the
debt is more than €100,000.
Conclusion
8.10 We are grateful to the Minister for this
information, which confirms that, except perhaps in the case of
transactions involving public authorities, the impact of these
proposals is likely to be slight, and that most suppliers in any
case regard recourse to late payment legislation as an action
of last resort. We also note that the version of the proposal
now on the table removes an earlier concern over the potentially
disproportionate level of compensation envisaged for debts of
over €10,000
in the case of commercial transactions. It would therefore seem
likely that the practical impact of the proposal, not least as
regards the current position within the UK will be small, and
that its main effect will be to reinforce the message that late
payment is unacceptable. We are therefore now clearing the document.
31 OJ No. L 200, 08.08.00, p.35. Back
32
At a rate up to seven percentage points higher than that set from
time to time by the European Central Bank (or the relevant central
bank, in the case of Member States not participating in economic
and monetary union). Back
33
(30213) 16097/08: see HC 19-i (2008-09), chapter 4 (10 December
2008). Back
34
OJ No. L 200, 08.08.00, p.35. Back
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