Corporate: Proposed Directive to tackle late payments in commercial transactions

The European Commission has adopted a proposal for a European Parliament and Council Directive combating late payments in commercial transactions between enterprises of the private sector and between such enterprises and the public sector. The general aim of the proposed Directive is to encourage respect of payment periods whilst acknowledging the principle of contractual freedom in the private sector. The Commission has been motivated by the fact that late payment damages cash flow, profitability and competitiveness and causes one in four insolvencies, for all European companies, particularly small and medium-sized enterprises.

The main elements of the proposed Directive are:

• Compensation for late payment: The level of interest for late payment will be required to be at least the sum of the tender rate of the European Central Bank, which would be the reference rate, plus a margin of at least 8% points. Member States will have the possibility to fix a higher margin. For Member States not participating in the third phase of the Economic and Monetary Union, the reference rate would be the equivalent rate set by their Central Banks. The statutory rate will be applied when there is no contract signed between the parties, or any such contract is silent on this matter. The statutory rate will change automatically if the reference rate has been changed. The margin will be reviewable and could if necessary be modified by a Commission decision. The principle of contractual freedom will be respected so that the statutory rate will not be applied if another rate is specified in the contract. The creditor would be entitled to claim not only the interest, but also full compensation from the debtor for any further damage caused by late payment. Member States' legislation will have to ensure that the seller ('creditor') be entitled to claim interest from the buyer ('debtor') on any outstanding amount when the due date has been exceeded. The due date for payment of debts, unless otherwise specified in the contract, or if the contract is silent on this subject or there is no contract, should not exceed twenty-one calendar days from the date of the invoice.
• Retention of title: Member States will be required to take the appropriate steps to ensure that their legislation contains provisions according to which the creditor shall retain title to the goods sold until the debtor has made payment.
• Accelerated recovery procedures for undisputed debts: Member States will have to ensure that there is an accelerated debt recovery procedure for undisputed debts. The whole procedure before the court will be required not to exceed sixty calendar days from the date of the creditors' request until the writ of execution or equivalent document becomes enforceable. The procedure would be available to creditors from all Member States, irrespective of their place of residence.
• Simplified legal procedures for small debts: Member States will have to ensure that simplified procedures are available for small debts up to ECU 20,000. These procedures will provide for simple low cost methods for taking legal action and will be applied on a non-discriminatory basis to creditors of any Member State.
• Public sector: Member States will have to take the appropriate measures to ensure that their legislation contains provisions to ensure public procurement contracts and tender specifications include precise details of the payment periods and deadlines practised. The due date for the payment of contractual debts by the public authorities will be required not to exceed sixty calendar days, without prejudice to any shorter times currently in effect. If the contract is silent or there is no contract, the due date for the payment must not exceed twenty-one days as would be the case in the private sector. The creditor would be entitled to interest from the public sector on any outstanding amount when the due date has been exceeded, the interest being paid automatically without the necessity of a claim. The interest rate applied to the public sector would be the same as for the private sector. The public authorities will not be permitted to request or require that the creditor does not use any of his rights.