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European Parliament Approves Default 30 Day Credit Terms
On 20 October 2010, the European Parliament approved (subject to some amendment) the European Commission's proposal to replace Directive 2000/35/EC on combating late payment in commercial transactions (the “Late Payments Directive”). If approved, the recast Directive will repeal the existing Late Payments Directive and will introduce several new provisions aiming to protect creditors by making late payments less attractive to debtors.
The New Directive
The new Directive aims to balance freedom of contract and the need to improve payment behaviour between businesses or businesses and public authorities. It proposes to introduce the following provisions:
- a requirement for public authorities to pay invoices within 30 days. This period may be extended to 60 days in exceptional circumstances only and may not extend beyond the 60 day period;
- a requirement for businesses to pay invoices within 30 days. This period may be extended to 60 days Parties may extend the payment period beyond 60 days where it is expressly agreed between the parties and if the extension is not "grossly unfair" to the supplier; and
- defaulting parties will be charged interest at a rate of 8% over the European Central Bank’s reference rate and compensation costs (at a minimum fixed amount of €40 for recovery costs).
Member States are permitted to have in force laws and regulations which are more favourable to the creditor than the provisions of the recast Directive and Member States are encouraged to establish codes of best practice to enhance the effect of the legislation.
With the economic downturn experienced in Europe in the last two years, many small to medium sized enterprises have experienced poor liquidity or have been forced to close their doors as a result of their insolvency. It is hoped that this new Directive will go some way to alleviating what has become an untenable situation for many small and medium businesses which arguably suffer the most as a result of late payments.
The amended text of the new Directive will now be put to the Council of the European Union for approval but it is expected that it will be formally adopted and come into force by the end of the year. In this case, it is likely the new Directive will have to be transposed into national law by beginning of 2013.