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New European law to affect credit management and debt collection Back  
Irish law has yet to deal adequately with the issue of late payment by companies. Gary Rice of Beauchamps Solicitors reviews developments in European legislation which should improve the position.
The commercial environment brings with it a high instance of unpaid invoices. Many businesses are faced with customers who either cannot or will not pay creditors on time. It is estimated that E35 billion is lost each year due to late payments between companies in the EU.

This problem is especially prevalent in small and medium sized enterprises (SMEs) which are unable to bridge any gaps which may occur due to late payments. Larger enterprises are usually not as vulnerable to tardy debtors as they benefit from more substantial reserves and accordingly can bridge the longer delays.

The only legislation governing late payment in Ireland is the Prompt Payment of Accounts Act 1997. The purpose of this Act is to ensure that the State and semi-state sector pay the business community, for goods and services rendered, on a prompt basis The Act stipulates not only the time period within which pubic bodies must pay their suppliers, but also that those public bodies that are late in paying will be liable to pay an interest penalty.

Notwithstanding the improvements brought about by the Prompt Payment Act 1997, there is currently no legislation governing late payment between commercial enitities in the private sector.

Late Payment Directive
The EU has tried to address this problem in a number of ways which started in 1995 with a recommendation setting out guidelines that could be followed by each Member State. The sum of their efforts culminated in a draft Directive in 1998 which should be finalised by the Council of the European Union later this year.

The objective of the Directive is to ensure that failure of SMEs is not due solely to the non-payment or the very late payment of their invoices by their customers. It is recognised that even the most prudent SMEs can be threatened by bankruptcy because of very late payment. Notwithstanding the fact that the EU Commission is wary of interference in the contractual relationships between companies, the Commission did not hesitate in proposing the Directive as action has to be taken to safeguard SMEs as these provide an important source of employment with the Union.

The proposed Directive covers commercial transactions in relation to undertakings acting in the course of their ‘independent economic and commercial activity’. Accordingly, transactions for goods and/or services for private purposes and consumers are not covered by the Directive.

The core principle of the proposed Directive is that interest becomes payable when a payment is delayed beyond 30 days of the due date. The Council amended the provisions suggested by the European Commission concerning the interest rate payable. The interest rate payable was reduced from 8 per cent to 6 per cent.

In addition, both the Council and the European Parliament recognised contractual terms in agreements between companies providing for long payment periods can also contribute to the late payment problems faced by SMEs. The Directive accordingly authorises Member States to legislate so that 60 days becomes the maximum contractual payment period. After that time, interest becomes payable.

The Parliament’s approach of inserting specific provisions on the issue was rejected by the Council in favour of the ‘authorising’ provision.

The Council’s amendments significantly weakened the Commissions’ initial proposals. The Council eliminated a provision which would have allowed undertakings to seek full compensation for damages resulting from late payment by a debtor. In addition a clause on retention of title was removed. Retention of title is a very valuable tool for making debtors pay on time.

The Council should formally adopt the Directive in the near future. The radical aspects of the Commission’s proposal as approved by the European Parliament have been weakened by the Council’s amendments. However, this Directive will still prove extremely valuable once implemented as 25 per cent of all insolvency cases can be attributed to late payment.

Regulation on insolvency proceedings
The need for harmonisation within the EU of insolvency law has long been recognised. Company Law harmonisation initiatives to date have avoided the issue of bankruptcy and insolvency law. Unfortunately, the European Insolvency Convention came to an early death when the United Kingdom refused to ratify the Convention in protest over the imposition of the BSE beef ban. However the ill-fated European Insolvency Convention has now been revived in the form of a European Regulation as a result of a joint German-Finnish initiative.

The basis for the adoption of the Regulation is that provided by Article 67 and Article 63 of the EU Treaty as amended by the Amsterdam Treaty. These Articles relate to ‘measures in the field of judicial co-operation in civil matters having cross-border implications’. However the Irish opt-out protocol applies, as do the UK and Danish opt-outs, but all three Member States have opted for the Regulation. This acceptance has been an important step in the development of bankruptcy law at European Level.

The objective of the Regulation is to improve the proper functioning of the Internal Market and address the problem of ‘forum shopping’ where parties transfer assets or judicial proceedings from one Member State to another in order to obtain a more favourable legal position.

The new Regulation will be the principal EU legislation in the field of insolvency law and will no doubt be the first of many initiatives concerning harmonisation of insolvency law as necessitated by the proper functioning of the Internal Market. The Regulation as drafted applies to all proceedings, whether the debtor is a natural or a legal person, a trader or an individual. Insolvency proceedings concerning insurance companies, credit institutions or investment undertakings holding funds or securities for third parties are excluded from the scope of the Regulation. This is because such entities are subject to special arrangements and, to some extent, the national supervisory authorities have wide-ranging powers of intervention.

The Regulation introduces the principle of main proceedings, opened in the country where the debtor’s centre of main interests is located. These proceedings, and judgements handed down in these proceedings, are to be recognised and effective in the other Member States with no further formalities. Unless proved otherwise, the centre of interest of companies is presumed to lie where their registered office is located.

A liquidator is empowered under the Regulation as drafted to exercise within the territory of the other Member States all the powers conferred on him or her by the law of the state in which proceedings have been opened. In this way, a liquidator may remove the debtor’s assets from the territory of the state in which these are situated, unless they are subject to third parties’ rights or reservation of title. In exercising these powers, the liquidator must comply with the law of the state in which he or she is taking action.

The Council referred the draft Regulation to the Economic and Social Committee of the European Communities which gave the its qualified approval to the draft Regulation. It is hoped that the Council will adopt the Regulation later this year.

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