Written by Sam Fowler-Holmes, Matilda Johnson, Luna Owen, Geoff Wynne and Pedro Leake-Bandeira
On 12 September 2023, the European Commission proposed a new EU Regulation on combatting late payments in commercial transactions which will revise and replace EU Directive 2011/7/EU (the Late Payment Directive). The Commission says it aims to reduce the significant impact that late payments have on businesses and SMEs by addressing shortcomings in the Late Payment Directive.
The proposed EU Regulation will introduce stricter and more streamlined measures to prevent late payment practices, such as enforcement and redress measures the Commission says are designed to protect creditors from late payments and will seek to rectify asymmetries in the contractual bargaining power between large debtors and small creditors.
Some of the headline changes proposed include:
- The introduction of a single maximum payment term of 30 days (reduced from the current 60-day term) for the vast majority of commercial transactions between businesses and businesses and public authorities.
- The removal of the right (as currently included in the Late Payment Directive) for contracting parties to extend payment terms where this would not be “grossly unfair” to the creditor.
- A restriction on the creditor’s ability to waive its right to claim interest for late payment from the debtor and an automatic obligation on debtors to pay late payment interest on overdue amounts.
- The addition of enforcement and redress measures to protect creditors, such as a requirement that member states designate enforcement authorities to monitor compliance and enforce the Regulation in the relevant member state.
Impact on supply chain finance
Supply chain finance is a valuable and widely used tool for financing and optimising working capital in supply chains, as highlighted during the Covid-19 pandemic. If adopted, the Regulation has the potential to pose significant challenges to contracting parties falling within its scope to arrange their commercial transactions as they see fit, including in connection with parties (including funders) providing commercial credit via extended payment terms. This in turn could have a negative impact on the supply chain finance industry which can provide benefits to both creditor and debtor in a commercial transaction. While the Commission’s focus on protecting the position of SMEs should be welcomed, the wider impact of the proposed Regulation on the supply chain finance industry is in need of careful consideration.
Implementation
The EU Commission’s proposal marks the first step in the EU legislative process. The proposed Regulation will now need to be considered and approved (with scope for amendments) by both the European Parliament and the European Council before it can be adopted.
Further Information
For further information, please contact the Sullivan team or visit the European Commission’s Q&A page.
[1] https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4412
