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Further changes planned for rules on late payment of debts and challenging “grossly unfair” payment terms

08 December 2015 #Corporate

The negative impact that late payment of debts has on small and medium sized businesses is well documented.  In 2014, the Federation of Small Businesses carried out a survey that revealed that at least 51% of its members had suffered from late payments in the previous 12 months. Figures for the same year from the Institute of Directors indicated that two thirds of its small and medium sized members were having problems getting timely payment of an invoice.

Statistics show that late payment debt has reduced since 2014, however it remains a significant issue for businesses.  In June 2015, it was reported that the overall level of late payment debt owed to small and medium sized businesses in the UK was £26.8billion and the average amount owed to small businesses was £31,900.

This is a serious issue as not only does late payment put cash flow and growth expectations of businesses under pressure but, in serious cases, can result in businesses failing.   Further, the negative ramifications of late payment often extend beyond the immediate business, who may have no option but to push the problem down the supply chain to ensure their own survival, potentially involving many more businesses in the problem.

Whilst late payment of debts impacts all businesses regardless of size, smaller businesses are more vulnerable to unfavourable or unfair practices.  The imbalance of power between large and small enterprises provides larger organisations with the opportunity to negotiate more favourable payment terms from their smaller suppliers, leaving small businesses more open to exploitation.  Often, small businesses do not feel they are in a position to challenge harsh payment terms which are forced upon them by larger enterprises.

Whilst this research makes some alarming reading, help may soon be at hand to assist small businesses tackle this issue as the Department for Business, Innovation & Skills is currently consulting on expanding the powers of trade bodies to challenge grossly unfair payment terms and practices.

At present, the EU Directive on Late Payments (2011/7/EU) gives representative organisations, such as trade bodies, the power to apply to Court challenge any grossly unfair payment terms and practices imposed on a business.  However, this EU Directive has only been partially implemented in the UK, and the power of trade bodies is currently limited to bringing challenges to unfair terms which remove or vary the right of a supplier to charge statutory interest for late payment.

The consultation is proposing to bring UK legislation in line with EU law by enhancing the current powers that UK representative bodies have if they wish to challenge grossly unfair payment terms and practices.

The consultation proposes amending the Late Payments of Commercial Debts (Interest) Act 1998 Act, to make it clear that a representative body can challenge any grossly unfair payment terms or practices.  The consultation also proposes that representative bodies should have the flexibility to decide whether to take action on behalf of an individual business, a group of individual businesses, and also on behalf of members and non-members.

This proposal is part of a broad range of actions currently being considered to help tackle late payment and unfair payment terms and practices.  Such measures include the establishment of a Small Business Commissioner, action to increase transparency on payment practices and promoting wider culture change with a strengthened Prompt Payment Code.

The Small Business Commissioner is aimed to help small businesses avoid having to go to Court to resolve payment disputes with their larger commercial customers.  However, there will still be times when going to court is the necessary course to take action against unlawful ‘grossly unfair’ terms and practices, and therefore it must be seen as a positive step that small businesses may soon have a range of options available to them, and, where they need it, the opportunity to have the support of their business representative bodies.

Leanne Consiglio

Clarkslegal, specialist Corporate lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Corporate matter please contact Clarkslegal's corporate team by email at by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Ashan Arif

Ashan Arif

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