Late Payment of Debts - A Reminder
Are You Making Use
of Remedies Provided by Legislation?
Late payment by Debtors can have a detrimental effect on your business's cash flow and reduce its profits so much so that your business could be threatened.
It was the failure of businesses due to this aspect of trading that prompted the Government to provide businesses with a tool to encourage its Debtors early repayment of debts.
The Late Payment of Commercial Debts (Interest) Act 1998 came into force in November 1998. The Act is being phased in, in three stages, 1st November 1998, 1st November 2000 and 1st November 2002.
Despite this remedy, it appears that businesses have been slow in taking up this remedy and continue to provide "free credit" to their customers.
The first two stages are already in force.
The first stage (1st November 1998) provides remedy for small businesses (under 50 employees) to claim interest against large businesses (those over 50 employees) and the Public Sector.
The second phase (1st November 2000) allows small businesses to claim interest against other small businesses.
Prior to the Act, businesses could only claim interest if there was a term in the contract which enabled it to do so alternatively once the debt was pursued through the Court.
Now, businesses to which the Act applies have a term implied into their contracts to which the Act applies entitling statutory interest fixed at the rate of 8% above Bank of England base rate to be claimed from late paying Debtors. In most cases, interest at the said rate shall be paid 30 days after the date upon which the supplier has performed his obligation.
The Act only applies to supply of goods and services where both the seller and the purchaser are dealing in the course of business.
Any contract term attempting to exclude the right to statutory interest shall be void unless there is a substantial remedy for late payment of the debt i.e. the parties may agree to vary the right to statutory interest provided the remedy so agreed is substantial.
A remedy is regarded substantial unless:-
(i) it is insufficient either for the purpose of compensating the supplier for late payment or for deferring late payment and
(ii) it would not be fair or reasonable to allow the remedy to be relied upon to oust the statutory rate.
Courts will have to take into account a number of factors such as the benefits of commercial certainty, bargaining position of parties, whether the term was imposed by one party to the detriment of the other and so in deciding what will amount to fair.
Likewise it is questionable what will amount to substantial remedy and may therefore be open to challenge.
The Act is not retrospective.
NITA KING
HEAD OF COMMERCIAL LITIGATION
LEMON & CO
This article gives a general overview only and cannot be relied upon in any particular case. It does not constitute legal advice. Specific legal advice must always be considered.
For further information, please do contact Nita King on 01793 527141 alternatively by email on nita.king@lemon-co.co.uk
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Late payment by Debtors can have a detrimental effect on your business's cash flow and reduce its profits so much so that your business could be threatened. It was the failure of businesses due to this aspect of trading that prompted the Government to provide businesses with a tool to encourage its Debtors early repayment of debts....</p>