Business Debts and Statutory Interest under the Late Payment of Commercial Debts (Interest) Act 1998

A significant number of businesses fail as a result of late or unpaid commercial debts. Indeed large businesses are often prone to using their commercial weight in this area to exploit commercial advantage and delay payments to smaller suppliers who need the money faster to meet their expenditure.

In order to attempt to rectify this problem and ensure companies adopt fairer payment and credit check practices legislation has come to the aid of this problem.

The Late Payment of Commercial Debts (Interest) Act 1998

This Act came into force in 1998 as amended in 2002 to provide some measures of relief for companies of all sizes. The provisions of the Act allow UK businesses, for all contracts created on or after 7 August 2002 , to charge interest on late payments and debt recovery costs for clients and customers that have exceeded payment terms agreed by the parties.

The effect of this legislation allows businesses to charge 8% above the Bank of England base rate set on a twice-yearly basis and debt recovery compensation of up to £100 on each overdue order.

The charges that can be levied under this Act are much more likely to exceed any interest a company can benefit by withholding the sum due. The obvious incentive of the legislation is to encourage businesses to pay within the contractually agreed timescales.

These provisions as to statutory interest can be ousted by contract, but only in so far as the contract provides a substantial remedy for late payment. Section 9 of the Late Payment of Commercial Debts (Interest) Act 1998 provides the definition for a substantial remedy. A contractual remedy for late payment is substantial if either the remedy is apt both to deter late payment and to compensate the creditor or even if it is not apt, it is fair and reasonable to allow reliance on it, taking account of the needs of commercial certainty and the relative bargaining positions of the parties.

All attempts at inserting terms into a contract to circumvent the implied provisions as to statutory interest is subject to the requirements of reasonableness under the Unfair Contract Terms Act 1977.

The requirements of reasonableness implied into contractual terms make it difficult to ouster the rights under the Late Payment of Commercial Debts (Interest) Act 1998 to a lump sum for failure to pay under a contract.

Exceptions to applicability of the Late Payment of Commercial Debts (Interest) Act 1998

The Act only applies to debts and not damages and the Act does not apply to claims for liquidated damages clauses or insurance indemnity policies as these sums are not considered to be a debt but damages awarded by failure to perform under a contract.

Where an Act of parliament provides for a right to interest or to charge interest such as the Supreme Court Act 1981 to which interest may be claimed and a Court has jurisdiction to award interest under the relevant enactment the Late Payment of Commercial Debts (Interest) Act 1998 does not apply.

Finally, contracts with no connection to the United Kingdom other than a choice of English law to govern them are not exposed to the Late Payment of Commercial Debts (Interest) Act 1998.

Failure to Pay

Threats of interest payments under the Late Payment of Commercial Debts (Interest) Act 1998 increasing the amount of money outstanding on a commercial bill may not produce payment for a variety of reasons.

There are a number options available to a business where invoices are not paid by a customer. Where a creditor company is in financial difficulty and the debtor company forms a large part of its revenue source, it is usually considered an act of goodwill not to pressure a company into paying immediately and allow a longer time for payment in return for the guarantee of future orders.

Of course this option may not be a commercially viable because there is no guarantees that a company will remain solvent when cash flow remains problematic. The option to issue a statutory demand for the outstanding money if the amount owed is greater than £750.00 is available where the debts are not in dispute. A statutory demand gives a company 21 days to pay the commercial bill and the threat of winding up may prompt payment. After 21 days, if the company has still not paid the outstanding invoices a winding up petition may be presented to the company and the appointment of a liquidator foreshadows the liquidation of the debtor company.

There is still no guarantee however that debt will be paid in full as the ranking of the creditor in insolvency proceedings would be that of an unsecured creditor. Where secured creditors have an interest in the winding up, take priority over unsecured creditors, and there will be no remaining funds in the winding up for the creditor.

The Late Payment of Commercial Debts (Interest) Act 1998 would also apply to the legal proceedings with the interest accruing on the outstanding money on a daily basis whilst the litigation continues.

Litigation has the added advantage that no other parties are likely to be involved in the proceedings and staking a claim to the money, as is the case with insolvency proceedings, unless insolvency comes about during proceedings. In which case any proceedings would be stayed with the onset of insolvency.

Conclusion

In short the Late Payment of Commercial Debts (Interest) Act 1998 is a statutory tool that makes not paying invoices an uneconomical business proposition for a party when delaying payment of invoices and gives a supplier leeway in being able to extract money from customers in a timely manner. This statutory tool also applies if failure to pay invoices occurs and litigation ensues.