Explanatory Memorandum to COM(2009)126 - Combating late payment in commercial transactions (Recast) implementing the Small Business Act - Main contents
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| dossier | COM(2009)126 - Combating late payment in commercial transactions (Recast) implementing the Small Business Act. |
|---|---|
| source | COM(2009)126  |
| date | 18-03-2009 |
Grounds for and objectives of the proposalMany payments in commercial transactions between businesses or between businesses and public authorities are made very late after delivery and often later than agreed or laid down in general commercial conditions. These practices impinge on liquid assets and complicate the financial management of enterprises. Late payments affect the competitiveness and viability of companies, notably SMEs. Payment delays also have a negative effect on intra-Community commercial transactions. Payment delays can be responsible for bankruptcies of otherwise viable businesses with the potential to trigger, in the worst case scenario, a series of bankruptcies across the supply chain. This risk strongly increases in periods of economic downturn when access to financing is particularly difficult. There are signs that this has started to happen as the current economic crisis unfolds, calling for a strong policy reaction. The Small Business Act [COM(2008)394] highlighted the key importance of SMEs for the competitiveness of the EU economy and stressed that effective access to finance was one of the major challenges SMEs have to face, together with the need to make better use of the opportunities provided by the Single Market. The European Economic Recovery Plan [COM(2008) 800] stressed that sufficient and affordable access to finance was a pre-condition for investment, growth and job creation in the context of the economic slowdown and asked the EU and the Member States to ensure that public authorities pay invoices for supplies and services within one month. Late payment by public administrations undermines the credibility of policies and contradicts declared policy objectives to provide for stable and predictable operating conditions for enterprises and foster growth and employment. Given the importance of public procurement in the EU (more than 1,943 billion euro per year), late payment by public authorities has a strong negative impact on enterprises, notably SMEs. Many public authorities do not face the same financing constraints as businesses and late payment in their case is avoidable. It should therefore be more severely sanctioned when it occurs. Moreover, diverging payment attitudes across the EU might hamper business participation in public tenders, which not only distorts competition and undermines the functioning of the internal market, but also reduces the capacity of public authorities to get best value for tax payers' money. Accordingly, this proposal aims at improving the cash flow of European business which is particularly important in times of economic downturn. It also aims at facilitating the smooth functioning of the internal market via the elimination of related barriers to cross-border commercial transactions.It will achieve this by providing creditors with instruments that enable them to fully and effectively exercise their rights when paid late and by confronting public administrations with measures that effectively discourage them from paying late.
General contextIn the EU, most goods and services are supplied by businesses to other businesses and to public authorities on a deferred payment basis whereby the supplier gives the client time to pay. This time period is agreed between the parties, or set out in the supplier's invoice or laid down by law. At the latest at the end of this period, the supplier expects payment for the goods delivered or services rendered. Payment made after this period constitutes late payment. Directive 2000/35/EC was adopted to combat late payment in commercial transactions between businesses or between businesses and public authorities. It specifies, inter alia, that statutory interest may be charged when payment is not made within the contractual or legal deadline.There is overwhelming evidence that, despite the entry into force of Directive 2000/35/EC late payment in commercial transactions is still a general problem within the EU. In addition, there is also evidence in a number of Member States of unjustifiably long contractual payment periods in transactions involving public administrations. Both problems are a serious impediment to a healthy business environment and to the functioning of the single market magnified in times of economic downturn. The roots of late payment in commercial transactions and the corresponding passive attitude of many creditors are diverse and interrelated:1. The market structure: the level of competition within a market, the market power of market participants and the corresponding fear of harming commercial relationships with clients are important factors determining whether creditors accept or refuse late payment and whether debtors seek an extension of the period of trade credit.2. Changing macroeconomic conditions: A business cycle downturn is likely to cause more late payments as firms delay paying their invoices. The consequences of late payment are also more serious in times of economic downturn as alternative financing is more difficult to obtain.3. Access to finance and budgetary constraints: The availability of credit, monetary policy, the flow and nature of credit information, the liquidity position of the firm and the availability of financial resources from banks may also affect late payment, particularly for businesses for which bank credit is a substitute for supplier financing. Many debtor enterprises consider late payment an efficient and cheap way to finance their own businesses and activities. For public authorities, late payments to creditors are an easy, but unjustified, way to overcome budgetary constraints by postponing payments to the next budgetary period.4. The financial management practice of debtors (including public authorities) and the credit management practice of creditors as well as their product and service quality and after-sales service are important factors in (avoiding) late payment. 5. The absence of effective and efficient remedies: despite Directive 2000/35/EC, many businesses, in particular SMEs, do not charge interest when entitled to do so, which in turn decreases the motivation of debtors to pay in time. For some creditors, the cost of taking action against late payment is not justified by the financial benefits. In many cases, the expenses of the extra paperwork cannot be recovered. Chasing late paying clients or charging interest for late payments generates administrative costs that many businesses wish to avoid. In addition, several key provisions of the Directive are unclear or difficult to implement in practice.Although Directive 2000/35/EC has some shortcomings, the fundamental concepts of interest for late payment, the retention of title and recovery procedures for unchallenged claims constitute essential and widely accepted pillars of the legal framework combating late payment. However, despite some recent improvements, late payment remains a generalized problem in the EU, with public administrations in a number of Member States displaying particularly bad payment behaviour. This continues to negatively affect the functioning of the internal market and risks posing a serious threat to business survival in times of economic crisis. Therefore, while safeguarding the main elements of the Directive, it is essential to introduce additional tools to reduce the number of late payments in commercial transactions, to shorten payment periods for public administrations and to substantially reinforce the incentives for public administrations to pay in time by recasting the Directive, incorporating in a single text both the substantive amendments made to the Directive and its unchanged provisions. This proposal would replace and repeal Directive 2000/35/EC. Once adopted by the legislator, it will naturally be taken into account by the Commission at the occasion of the forthcoming revision (2010) of the Financial Regulation and its Implementing Rules.Meanwhile, as the revision of the financial rules by the legislator is a long process, the Commission adopted a Communication i instructing its services to implement without delay a set of measures aimed at streamlining financial rules and accelerating budget implementation to help economic recovery, in particular through the improvement of its own payment performance and the setting of targets for reduced payment time-limits.
Existing provisions in the area of the proposalThe only existing provision is Directive 2000/35/EC which would be recast by this proposal.
Consistency with the other policies and objectives of the UnionThis proposal is part of the Lisbon Agenda for Growth and Jobs and implements the Small Business Act [COM(2008)394] and the Commission Communication on a European Economic Recovery Plan [COM(2008)800].
Consultation of interested parties
Consultation methods, main sectors targeted and general profile of respondentsStakeholders were consulted in a general public consultation through I.P.M. (Your Voice in Europe). The EBTP (European Business Test Panel) was also consulted.
Summary of responses and how they have been taken into accountA broad majority of respondents believes that the current statutory rate laid down in the directive is satisfactory. Most respondents, however, urged the Commission to put in place effective and efficient remedies in case of late payment and to strengthen the role of representative organisations. The responses served as a very important element for the impact assessment.
An open consultation was conducted over the internet from 19/05/2008 to 31/08/2008. The Commission received 510 response(s). The results are available on ec.europa.eu/enterprise/regulation/late_payments
There was no need for external expertise.
Impact assessmentThe impact assessment and its executive summary give an overview of the different options. Only options 3a/2 (legislative - harmonisation of periods for payment by public authorities to businesses), 3c (legislative - the abolition of the €5 threshold), 3d (legislative - the introduction of a 'Late Payment Fee') and 3e (legislative - the introduction of a 'Late Payment Compensation') meet the criteria of effectiveness, efficiency and consistency. Therefore, these 4 options constitute the basis of this proposal.
The Commission carried out an impact assessment listed in the Work Programme, whose report is accessible on ec.europa.eu/enterprise/regulation/late_payments
Contents
Summary of the proposed actionThis recast of Directive 2000/35/EC aims at improving the effectiveness and the efficiency of remedies for late payment through the introduction of an entitlement to the recovery of administrative costs and compensation for internal costs incurred due to late payment. In the case of public administrations, the proposal aims at shortening payment periods through the harmonisation of periods for payment by public authorities to businesses and at reinforcing disincentives to late payment by a flat rate compensation from the first day of the delay amounting to 5% of the invoiced amount in addition to the interest for late payment and the compensation for recovery costs. Finally, the proposal also abolishes the possibility to exclude claims for interest of less than €5.
Legal basisArticle 95 EC Treaty.
Subsidiarity principleThe subsidiarity principle applies insofar as the proposal does not fall under the exclusive competence of the Community.
The objectives of the proposal cannot be sufficiently achieved by the Member States for the following reason(s).
In the absence of Community legislation prior to the implementation of Directive 2000/35/EC, late payment in commercial transactions was an important impediment to intra-Community trade.This is because the absence or ineffectiveness of national rules combating late payment unfairly protects national economic operators against products and services coming from other Member States. Failure by a Member State to prevent obstacles to the free movement of goods or services originating in other Member States caused by late payment by national authorities or undertakings is just as damaging to intra-Community trade as a trade-restrictive act. In addition, diverging payment attitudes of public authorities across the EU might hamper business participation in public tenders, which not only distorts competition and undermines the functioning of the internal market, but also reduces the capacity of public authorities to get best value for tax payers' money.
Community action will better achieve the objectives of the proposal for the following reason(s).
The objective of ensuring the functioning of the internal market by reducing obstacles to intra-EU trade arising from late payment could not be sufficiently achieved by Member States or by Directive 2000/35/EC. It was therefore felt appropriate in accordance with the principle of subsidiarity, by reason of the scale and effects of the problem, to achieve this by further action at Community level.
Surveys and consultation of stakeholders confirm that the reduction of late payment in commercial transactions requires EU action through a recast of Directive 2000/35/EC. The available figures indicate that most businesses perceive selling goods and services to businesses and authorities in another Member States as entailing a higher risk of late payment. Among other reasons, the risk of late payment discourages enterprises from selling products and services in other Member States since it increases uncertainty and the cost of doing business. In that case, transaction costs are higher due to asymmetric information and insecurity about the market position and the solvency of a client established outside the domestic market. For many debtors the risk to reputation related to late payment is much lower when the creditor is established in another Member State since the damage to reputation diminishes with distance. Moreover, trade across national borders amplifies the costs of offering trade credit because language, jurisdiction and access to solvency data tend to be different and, thus, monitoring costs increase while the chances of successfully enforcing payment are lower. As a result, trade credit insurance and other instruments coping with trade risk management are often used in cross-border trade. These instruments reduce revenue uncertainty but may absorb an important fraction of the profit margin, in particular for small enterprises.
During the impact assessment process, many non-legislative options were discarded for reasons related to subsidiarity as set out in detail in the impact assessment.
The proposal therefore complies with the subsidiarity principle.
Proportionality principleThe proposal complies with the proportionality principle for the following reason(s).
The Directive remains an optional instrument for economic operators in so far as it does not oblige them to claim interest for late payment or to claim compensation for recovery costs. Moreover, the proposal does not prevent undertakings from agreeing upon other contractual provisions regarding payment, including in the case of transactions between undertakings and in exceptional cases also between public authorities and undertakings the payment period, in accordance with the fundamental principle of freedom of contract between economic operators. The proposal also includes sufficient flexibility to allow Member States to transpose the Directive in the light of economic and commercial conditions in their territory. In addition, the proposal does not affect the existing possibility for Member States to maintain or bring into force provisions which are more favourable to the creditor than the provisions necessary to comply with the Directive.
This proposal does not lead to any new administrative burden for economic operators. The financial burden stemming from the new entitlement to claim reimbursement of recovery costs will be proportional to businesses' payment behaviour. The budgetary impact for national authorities will be proportional to their capacity to ensure compliance with the provisions of the directive.
Proposed instruments: directive.
Other means would not be adequate for the following reason(s).Considering that this proposal is a recast of an existing Directive which provides for a wide margin of manoeuvre for Member States, alternative options would not have been sufficient to achieve the proposed objectives
The budgetary implications are limited to administrative expenditure.
Simplification
The proposal provides for simplification of legislation.
The definitions of essential terms of the Directive are broadened and regrouped in order to put an end to divergent interpretations. Ambiguous provisions as regards the rights of creditors are either deleted or fully redrafted so that economic operators know exactly their rights under the Directive. A further element of simplification is the general obligation of transparency introduced for the Member States. Finally, the vague concept of 'recovery costs' is replaced by a new system consisting of a defined sum for internal recovery costs.
The proposal is included in the Commission's rolling programme for up-date and simplification of the acquis communautaire and its Work and Legislative Programme under the reference 2009/ENTR/006.
Repeal of existing legislationThe adoption of the proposal will lead to the repeal of existing legislation.
The proposal includes a review clause.
Correlation tableThe Member States are required to communicate to the Commission the text of national provisions transposing the Directive as well as a correlation table between those provisions and this Directive.
European Economic AreaThe proposed act concerns an EEA matter and should therefore extend to the European Economic Area.
Detailed explanation of the proposalThe provisions of Directive 2000/35/EC on its scope (Article 1 of this proposal), interest in case of late payment (Article 3), the retention of title (Article 8) and the recovery procedure for unchallenged claims (Article 9) remain fundamentally unchanged. The various definitions and concepts are streamlined and brought together in Article 2.The reasons for the other proposed substantive amendments are the following:Article 1 i removes the possibility that claims for interest of less than €5 may be excluded by Member States. This will clear a hurdle for claiming interest for late payments, in particular for SMEs and for late payment in smaller transactions where interest amounts to only a small sum.Article 4 specifies that, in the case of late payment, creditors will be entitled to obtain a sum for internal recovery costs related to the amount paid late. The objective is twofold: firstly, the creditor would be able to recover his internal administrative costs related to late payment and, secondly, this would have a deterrent effect on debtors, additional to the statutory interest.Article 5 of the proposal tackles late payment by public authorities which will be obliged as a general rule to pay invoices for commercial transactions leading to the delivery of goods or the provision of services within 30 days. Past this period, the creditor will in principle be entitled to compensation of 5% of the amount specified, in addition to the interest for late payment and the compensation for recovery costs. The budgetary impact for national authorities will be proportional to their capacity to ensure compliance with the provisions of the directive. In addition, the expected improvement in payment behaviour of public authorities will help reduce the number of business bankruptcies and thus reduce the social costs that they entail.Article 6 of the proposal strengthens the provisions about grossly unfair contractual clauses. It includes a provision whereby a clause which excludes interest for late payment will always be considered as grossly unfair.Article 7 obliges Member States to ensure full transparency about the rights and obligations stemming from this directive and in particular to publish the statutory interest rate. This aims at providing in the most appropriate way practical information to businesses, and especially SMEs, and will enable them to take action against debtors paying late.Article 10 lays down the monitoring and evaluation system allowing other European institutions and stakeholders an insight into the actual implementation of the Directive.