Chasing commercial debts? Don’t lose interest

Insights - 28/02/2018

Late payment of debts is a problem for many businesses, causing cash flow and resourcing problems which, in a worst case scenario, can sound the death knell for small and large businesses alike.  The stats are astounding:  small businesses are waiting for an average £31,901 in overdue payments at any one time and these overdue payments cost the UK economy a staggering £2.5 billion per annum according to the Federation of Small Business (FSB).

The UK was one of the first countries to try and protect businesses against the culture of late payment.  The Late Payment of Commercial Debts (Interest) Act was introduced in 1998 and gives businesses the right to claim interest from business customers at the rate of 8% over the Bank of England base rate.  However according to the FSB, 80% of small businesses do not charge interest on late payments.  Why?  It could be a lack of awareness but a more likely answer is that the Davids do not want to stand up to the perceived goliaths. The problem is that the Act only applies if a payment is overdue – canny businesses who agree (or, using their commercial clout, impose) long credit terms escape scot-free.

Is there a solution?  

The Act has been amended over the years by subsequent regulations. The change that had the greatest potential to redress the balance in the David and Goliath situation was first introduced in 2002: representative bodies like the CBI and the FSB were given the right to apply to the High Court to stop businesses from relying on “grossly unfair payment terms”.  This has just been updated by the Late Payment of Commercial Debts (Amendment) Regulations 2018 which came into force on 26 February 2018. The new Regulations are not ground breaking but they do extend the powers of representative bodies so that any business (and not just small businesses) are now entitled to ask representative bodies for help.

What is grossly unfair and the consequences 

It is not particularly clear what counts as “grossly unfair” as the legislation doesn’t define this and sadly the cases addressing this are few and far between.  Time will tell as and when more cases are brought before the courts.  However, in the meantime, goliaths should consider the following broad guidelines when agreeing credit terms with their suppliers:

  • Are the credit terms a gross deviation from good commercial practice and contrary to good faith dealing?
  • Does the nature of the goods or services being supplied justify extended credit terms?
  • Does the buyer have an objective reason for requiring a change from the statutory provisions?

Should you have any questions or require help or assistance in relation to these or any other corporate or commercial issues please feel free to contact your usual corporate advisor at Morrisons Solicitors or John Andrews, a Partner in our Corporate and Commercial team.

 

Other articles from February's newsletter

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Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.