In this article, we highlight some of the legal implications of . . .

Late Payment of Debts

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Readers are advised that the information contained in this report applies only to the UK and does not constitute legal advice. It is a descriptive summary of the law, as we understand it. While every care has been taken to ensure that the information is correct and fairly stated, we do not accept liability for any errors or omissions nor the consequences of any actions taken. Readers should seek qualified legal advice before acting upon the contents of this report.

After 1^st November 1998, a new law came into force in the UK. It is called the “The Late payments of Commercial Debts (Interest) Act”. It will affect your business, so you need to know a little about it.

Up until now, companies have only been able to claim interest on monies outstanding for payment if the sales contract specifically reserved that right or if an award for interest payments was made through the courts.

This new law changes that. It is designed to provide some financial protection to small companies (defined as employing less than fifty people) from the inefficiency (or perhaps dishonesty?) of large companies (more than fifty people) who do not pay invoices in a timely manner.

The new law enables such small companies to charge interest on debts paid late by large companies.

While currently this is the limit of the Act, there is a plan to extend the law to enable any company (large or small) to charge interest on late paid debts, to any other company large or small. So, no one can afford to ignore the implications of this Act.

The Act applies to contracts which:

Are commercial (i.e. businesses trading with businesses, not private, retail, etc.).
Made after November 1^st 1998
Have no provision for interest charges within the contract itself.

Note that the act still applies if a contract has been produced which does contain interest provision, but this has been done in such a way as to avoid the effects of the Act. For example, by setting an unreasonably low interest rate or an unreasonably long credit period.

A payment is defined as being “Late” if it is:

Received any time after an agreed payment date
After a credit period that is normal in that industry

If no date or credit period has been agreed, thirty days from either the delivery of the goods or service, or from the delivery of the invoice (whichever is the earlier)

The interest rate due is also defined in the Act. As:

8% over base rate.

This rate has been set to reflect a figure close to the true cost of borrowings to small firms. It is a figure that is considerably higher than is normally used in standard terms and conditions.

The implications of this fact affect you whether you are buying or selling:

If you are buying – and your supplier has standard terms that include provision for interest charges on late payments of debts, you may still be liable to pay interest at the higher rate (as defined in the Act) unless you have re-agreed that the rate defined in the Terms and Conditions does still apply.

If you are selling – and you use standard Terms with your customers that include interest charges, you too may be unclear which interest rate applies. This is an area of potential conflict between your business and your customers, so you should certainly consider and review your interest provision in the light of the new Act.

Further information on this Act and how it might affect your business is available from the DTI or from your own legal advisors.