Late payment
The problem
It is often said that cash is the lifeblood of a business. Indeed, a quarter of all corporate insolvencies are caused by cash-flow problems. So can anything be done to obtain compensation for late payment?
The law
Unpaid sellers of goods and suppliers of services have a statutory right to claim interest on overdue debts and compensation for late payment under the Late Payment of Commercial Debts (Interest) Act. The act came into force in stages between 1 November 1998 and 7 August 2002.
The effect of the act is to imply certain terms into contracts made on or after 7 August 2002 entitling creditors to interest automatically from the due date until payment is made, with a set rate of interest of 8% above base rate (simple interest), and to compensation at fixed rates. Compensation will be recoverable depending on the level of the debt, ranging from £40 for debts of less than £1,000 to £100 for debts of more than £10,000.
The act applies to debts arising under most contracts for the sale of goods or supply of services made between businesses, and says that:
- Interest can be claimed automatically from the due date until payment is made.
- If the contract does not provide a due date for payment, it will be 30 days from performance (or where the contract sum is unascertained, from the date of notice of the amount sought by the seller).
- Claims do not need to be pursued immediately, but if they are to be claimed, the claim must be pursued within the limitation period (usually six years).
It is possible to vary the interest entitlement provisions of the act by the terms of the contract; eg, the contract may provide for a longer payment period or reduced rates of interest. However, any variation will have to provide a "substantial contractual remedy for the late payment", otherwise a court will imply the terms of the act.
A remedy is "substantial" if it provides adequate compensation for late payment and is fair and reasonable (compared with the statutory right) and serves to deter late payment. Regard will be had to all of the relevant circumstances at the time the terms were agreed, including such matters as the strength of the parties' bargaining positions and any inducements given to agree the term.
The courts are able to reduce or disallow part or all of the interest payable to the seller if the interests of justice so require, having regard to the seller's conduct.
Expert advice
The right to claim interest and compensation under the act can be exercised by any seller, regardless of its size, on contracts made on or after 7 August 2002. Small companies (effectively, those with 50 employees or less) can claim interest on contracts made as far back as 1 November 2000, depending on what size of business the buyer was.
The interest and compensation can be recovered by taking court action for recovery of a debt. The court will also allow you to charge additional fixed costs for your legal fees and to claim court fees.
Check list
- Review your standard terms of business - both sale conditions and purchase conditions. Consider whether the rate of interest and compensation is appropriate in light of the act.
- Ensure administrative procedures are in place so that payments are sent out on time.
- Ensure that your credit-control procedures are in order and that reminders and collection procedures commence as soon as a debt is overdue.
Contact
Michael Frisby, Stevens & Bolton
01483 734244
michael.frisby@stevens-bolton.co.uk
See also:
www.payontime.co.uk
Beware!
Remember that every business is both a buyer and seller, and so it is important to check that you are making payments to your creditors within payment terms, otherwise you could be on the receiving end of a claim.
While exercising a right will recover interest and compensation, you may think twice before exercising the right if you end up losing a valued customer.