Cough up - with interest

The law on late payments is being changed - 100 years too late.
Click to follow
The Independent Culture
YOU KNOW all the old favourites - "the cheque's in the post... it must have got lost in the mail... the man who signs the cheques is ill... the accounts person is on holiday..."

From 1 November, individuals and businesses with fewer than 50 employees will no longer have to swallow those excuses through gritted teeth.

The Late Payment of Commercial Debts (Interest) Act 1998 gives them the right to claim penalty interest - at base rate plus 8 per cent - from businesses and public bodies that fail to settle their bills on time. However, whether small businesses will pursue the interest at the risk of antagonising a customer is a moot point.

The Government clearly expects penalty interest to be claimed and sees the Act as an important step in changing the culture of late payment, which dogs small businesses.

The right to claim interest is being phased in over four years, starting with small businesses. It will then be extended after two years for use by small businesses against all enterprises and the public sector. It will be 2002 before the right can be used across the board.

A similar right is included in the European Commission's draft directive on late payment, which may take the law further to include the cost of chasing a debt. But that right will not come into effect until 2001.

Many companies already insist on contracts with agreed credit periods and the right to claim interest on late payment. But others are less precise. Where no credit period is defined in a contract, or no contract exists, the Act sets a 30-day default period after which interest can run. However, the Department of Trade and Industry's user's guide to the Act stresses that the default period should not be seen as a statutory credit period - the principal debt still becomes due the moment goods are delivered or a service is performed.

The Act also sets a statutory baseline for penalty interest which, at 8 per cent over base rate, is higher than the 2 per cent to 5 per cent normally written into contracts. If customers refuse to pay the interest, they can be pursued through the courts - the small claims court for sums up to pounds 3,000 (which is likely to be increased soon to pounds 5,000) or the county court for higher claims.

The Government wants businesses to agree their own contractual terms giving a right to interest if bills are paid late, which would take precedence over the legislation. However, these terms must provide a "substantial" remedy for late payment or they will be void, to prevent customers pushing for very low rates of penalty interest or excessively extended credit terms.

Nigel Miller, a commercial law partner with the London solicitors Fox Williams, says: "It is part of the culture in the UK that people rarely claim interest. When we draw up a contract for a client, we have traditionally inserted a provision for interest on late payment, but it is very rarely put into effect. People feel that they will be in danger of upsetting or losing a customer. It is one thing to chase a debt, another to chase the interest on it.

"However, cash flow for small businesses is obviously crucial. The legislation is a good development in that it might lead to people claiming interest as well as changing the culture of late payment."

The Forum for Private Businesses, with 20,000 members, is more gung- ho about the new Act. Its spokesman, Dave Harrop, said: "It has been a long time coming. The House of Lords said such a law was needed in 1893."

The Forum is a member of the new Better Payment Practice Group (BPPG), a consortium of small businesses and government and other bodies, which is launching a new payment code next week to coincide with the Act's introduction. Other members include the Institute of Directors and the Factors and Discounters Association.

Mr Harrop said: "We have just carried out a survey in which we asked Forum members what proportion of their overdrafts was owed to late payments. The average is 53 per cent, which is a shocking amount. We estimate that, nationally, overdue debts amount to pounds 20bn.

"People say that the legislation will backfire on small businesses. But small businesses are owed twice as much as they owe. This legislation has to be an improvement in redressing the power imbalance with big companies."

He said it was also a requirement of the Act that companies note their "contingent liability" in their accounts to show what they could be "hit for" if suppliers claimed penalty interest, which could set alarm bells ringing among shareholders.

The Federation of Small Businesses, also part of the BPPG, is soon due to publish a league table "naming and shaming" bad payers.

Brian Prime, the Federation's national policy chairman, said that it was against statutory penalty interest because it felt that it would work against small businesses: "It's a job to get the money, let alone interest. But the fact that the Government is backing small business and that the problems are being raised should help improve the payment culture."

Recovering debts can be costly and time-consuming. The legislation allows the supplier to employ an agent, such as a debt collector, to chase the debt. The interest can also be sold or transferred to a third party, such as a factoring firm.

David Marsden, the vice-chairman of the Factors and Discounters Association, said most "realistic" business people realised that, on its own, threatening to charge penalty interest and in fact doing so would not change the payment culture on its own. However, it was a useful tool and should encourage customers to improve their accounting and suppliers to improve their credit control and invoicing.

Richard Wilson, the business policy director of the Institute of Directors, said that the organisation was surprised at the extent of support for penalty interest among its members. "The legislation is being launched at a very sensitive time, with the economy slowing down," he said. "It is not a panacea for the problem, which has existed since time began. But, alongside other measures, it should help."

Comments