EU toughens up on non-payers

The food industry is not immune from the curse of late payment of debts. In fact it’s very much alive, if the report in the UK’s Telegraph newspaper (18 October 2012) is to be believed. The headline – “Sainsbury’s in ‘hall of shame’ over supplier payments” – details how one of the UK’s biggest supermarkets, Sainsbury’s, has changed its payment terms from, in some cases, 30 days to 75 days. Ten months earlier, the UK’s National Farmers’ Union had called on the UK government to crack down on late payment.

The issue of late payment affects food sector firms throughout Europe. FoodDrinkEurope.eu​ has commentary on the topic and reports on Globalmeatnews.com​ noted that French chicken producer Groupe Doux found itself in administration in August 2012, owing €140m, while the Russian poultry sector has been hit by bankruptcies, with producers unable to afford feed or power. In both cases, the financial troubles will no doubt trickle down through the sector.

In 2000, the European Parliament adopted its first set of rules designed to combat the issue of late payments. The rules aimed to reduce the financial and administrative burdens placed on businesses by excessive payment periods and late payments. They also aimed to ensure businesses could trade throughout the internal market at no greater risk than domestic trade.

However, the landscape on debt is about to change again as, by 16 March 2013, new rules must be in force across the European Union.

The existing regime​

The 2000 EU rules set a minimum standard of rights for unpaid suppliers, although national parliaments were free to adopt more stringent legislation. The rules only affect business-to-business transactions or transactions between a business and the public sector.

The EU rules introduced a statutory right for a supplier to claim interest – at an enhanced rate of 7% over the reference rate – for late payment, as well as a default credit period of 30 days, unless the contracting parties had agreed otherwise. At present, the default credit period runs from the latest date the supplier delivers the goods or services; or the day the supplier notifies the buyer of the amount of the debt.

It is still open for a supplier and a buyer to agree a different credit period and what contractual remedies will be available to the supplier if the payment is late. Where the parties have not agreed these terms, the law sets the fall-back position. While the parties can agree on any terms they like, the law insists that any contractual remedy for late payment must be ‘substantial’, otherwise the courts can strike out that part of the contract as invalid and the automatic statutory late payment rules will apply.

The rules also include the right to claim a fixed sum by way of compensation for late payment and additional reasonable debt recovery costs. Again, this only applies where a supplier and buyer have not agreed different terms.

The new rules​

The amended set of regulations issued by the EU is in response to what it terms the “damaging culture of late payment in Europe”. The new provisions replace the EU’s existing rules and include terms designed to:

•    Harmonise the credit period for payment by public authorities to businesses. Public authorities across the EU will have to pay for the goods and services they procure within 30 days or, in exceptional circumstances, within 60 days.
•    Maintain contractual freedom in business commercial transactions. Businesses will have to pay their invoices within 60 days unless they expressly agree otherwise and provided it is not grossly unfair.
•    Penalise late payment. The statutory interest rate applied to late payments will be increased to 8% over the reference rate. This is obligatory for late payments by public authorities to businesses, but may be contracted out of for business-to-business supplies, provided this would not be grossly unfair to the supplier.
•    Award suppliers a minimum fixed sum of €40 as compensation for the cost of recovering the debt, regardless of the size of the debt, as well as a continued right to recoup the reasonable costs of recovering the debts.

In practice​

The difficulty with the EU rules is that they might introduce elements of uncertainty into business transactions – for example, what is needed to “expressly agree”​ a credit period of longer than 60 days and what sorts of provisions are “grossly unfair”​ to a supplier? The government needs to issue guidance on these points.

Of course, it is not compulsory for suppliers to exercise these statutory rights to claim interest and compensation for unpaid debts. In each case, a supplier must decide whether to make use of the tools available to them at the risk of jeopardising existing business relationships. Hopefully, with new compulsory 30-day credit periods, public authorities will lead the way and set the example for the rest of the business world.

Hannah Drozdz is a professional support lawyer in the Corporate Recovery team at Gateley LLP. uqebmqm@tngryrlhx.pbz​