Article - Commercial

Late Payment of Commercial Debts

One of the most important issues for businesses, and particularly small businesses, is the payment of goods sold on credit.  Late payment of debts can severely impinges on the liquidity of the business which may mean that they have to turn to alterative measure to solve the short-term cash-flow problems including borrowing from commercial lenders.

The government has recognised that is is a significant problem and has introduced legislation to resolve this issue.  The Late Payment of Commercial Debts (Interest) Act 1998 ("the Act") has given a new statutory right to interest on commercial debts which are paid late even if the contract does not itself state that interest is payable in the event of late payment of the debt.

The Act covers any debts arising from the supply of goods and services to a business and interest can be claimed from the time any period of credit has expired. If the contract does not stipulate the period of credit then the Act implies a period of 30 days after latest of the following:

  1. Delivery of the bill;
  2. Delivery of the goods; or
  3. Performance of the service.

The main problem with the Act is that interest can only be claimed under the Act once Court proceedings have been issued.  This is claimed in the same way that the Claimant would claim interest under the County Court Act 1984 but the rate of interest to be claimed on contracts made after 7 August 2002 is 8% above the offical base rate of the Bank of England. 

Interest at this rate can be claimed up to Judgment or earlier payment. From Judgment, however, interest will run at the usual rate of 8% up to payment of the debt or 6 years after the date of Judgment, whichever is the sooner to occur.

Once statutory interest begins to run, the supplier is also entitled to a fixed sum, in addition to statutory interest, of 40 (for debts less than 1,000), 70 (for debts of 1,000 or more) or 100 (for debts of 10,000 or more);

The Act now applies to debts owed by all businesses and also the public sector. However, you can only use the Act if your Terms of Business do not have other provisions for interest on unpaid sums.  It may therefore be advisable to amend your Terms of Business to include interest under the Act where the sale is made to another business.

There are, however, limited exceptions to which the Act does not apply.  This includes consumer credit agreements and mortgages.

Article First Published: 23 May 2004

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