Proposal for a European Parliament and Council Directive combating late payment in commercial transactions
Date: 1998-03-25
Institutions: European Commission
Subjects: EU action, financial solvency, financial transaction, payment, trade policy

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 25.03.1998 
COM(1998) 126  final 

98/0099 (COD) 

Proposal for a 
EUROPEAN PARLIAMENT AND COUNCIL DIRECTIVE 

combating late payment in commercial transactions 

(presented by the Commission) 

EXPLANATORY  MEMORANDUM 

1. 

INTRODUCTION 

Late payment  of contractual  debts leads to cash-flow  difficulties,  undermines  profitability 
and  damages  competitiveness.  In  the  worst  cases,  they  result  in  insolvencies  and  job 
losses. One out of four  insolvencies  is due to late payment1.  33% of businesses in Europe 
see  late  payments  as  a  serious  problem  or  a  problem  threatening  the  survival  of  their 
business, with the figure as high as 51% in Greece, 50% in Italy and 46% in France2. With 
the level of unemployment  in Europe at around  18 million, late payment  is an issue which 
cannot  be  ignored  and  which  requires  action  at  Community  level.  The  Commission  has 
pointed  out  time  and  again  that  the  risk  of  business  failures  in  Europe  is  unacceptably 
high, with 50%) of newly created businesses failing to survive their first  five years3. As late 
payment  is  a crucial  factor  in the mortality  of businesses,  any  action  which  combats  late 
payment needs to be undertaken now. 

Failure to pay on time is a breach of contract. Yet all too often  paying late has become the 
norm,  rather  than  the  exception,  with  debtors  taking  a  cavalier  approach  to  their 
contractual  obligations to pay on time. The damaging  effects  on small  and  medium-sized 
businesses (SMEs) are particularly severe. 

The  lack  of  action  by  most  Member  States  to  tackle  the  problem,  and  the  persistent 
damaging  effects  of  late  payments  on  the  Single  Market,  have  led  the  Commission  to 
propose a Directive. This proposal therefore  contains a package of measures to combat  late 
payments  in  the  Community.  The  proposals  apply  to  late  payments  between  businesses, 
and between  the public sector and  businesses. The general  aim  is to encourage  respect  for 
payment  periods by businesses  and  the public authorities. The proposed  measures  respect 
the principle of contractual  freedom  in the private sector. 

2. 

EFFECTS  ON  THE  SINGLE  MARKET  AND  THE  PRINCIPLE 
OF  SUBSIDIARITY 

Late payments  are hindering the smooth  functioning  of the Single Market  and  preventing 
SMEs  from  benefiting  fully  from  the  opportunities  offered  by  the  Single  Market.  The 
differences  between payment practices in the Community arc striking4, with average actual 
payment  times  over  three  times  as  high  in  South  European  countries  than  in  Nordic 
countries.  The  differences  in  payment  times  and  the  problems  of  late  payments  are 
affecting  competitiveness  and  are deterring firms from  engaging  in cross-border  trade. On 
average  21% of  European  businesses  would  export  more  if  there  were  shorter  payment 

1 

2 
3 
4 

Source:  Fédération  Nationale  de  l'Information  d'Entreprises  et  de  la  Gestion  de  Créances,  Lyon, 
September  1997. 
European Payment Habits Survey  1996, Intrum Justifia, Amsterdam, April  1997. 
Enterprises  in Europe, Fourth Report, p. 62, European Commission,  1996. 
See  section  2.2  of  the  Communication  of  9  July  1997  for  a  summary  of  the  most  recent  statistics 
comparing payment times in Europe. 

delays from foreign customers (the figure was 48% in Ireland, 37% in the Netherlands and 
35% in Belgium)5. 

There are also wide variations between Member States' legislation on late payments6, such 
as  the  statutory  right  to  interest  on  late  payments:  such  a  right  does  not  exist  in  all 
Member States, and in those Member  States where the right exists, the rate of interest and 
the mechanism for setting the rate differ  widely. There are different  redress procedures and 
different  approaches  to  compensation  for  the  various  costs  of  pursuing  debts.  These 
differences  make recovery  of debts  from  other Member  States  a complex,  hazardous  and 
often  time-consuming business. 

Thus the question of the length of time it takes to make payments is not only of domestic 
interest  to  Member  States.  On  the  contrary,  practices  in  this  area  will  constitute  a  key 
element in the functioning  of the Internal Market. For example, businesses which normally 
allow their customers to pay after  30 days will have calculated their prices on the basis of 
such terms. If they have to wait three times as long before  receiving payment, their  profit 
will  be reduced,  or in the worst  case disappear.  At the  other  end  of the  spectrum, firms 
which  normally  calculate  their  prices  on  the  basis  of  payment  after  90  days,  will  find 
themselves  at  a  competitive  disadvantage  because  they  have  calculated  their  prices  too 
high  compared  to  competitors  in  other  Member  States.  The  present  situation  therefore 
leads  to  distortions  of  competition  which  will  be  felt  not  only  by  traders  involved  in 
transborder  operations but also by economic  operators who are only  active  in the  various 
domestic  markets  of  the  Member  States.  These  distortions  are  incompatible  with  the 
proper  functioning  of  the  Internal  Market  and justify  the  adoption  of  a  Directive  under 
Article  100a of the Treaty. 

This is why the Single Market Action Plan7, adopted by the Commission  and endorsed by 
the Amsterdam European Council in June  1997, identified  reducing late payment  as a key 
priority  for  ensuring  that  the  full  benefit  of  the  Single  Market  is  achieved  before  the 
beginning of Stage III of Economic  and Monetary Union, with  a proposal  for  a Directive 
on late payments to be tabled. 

As stated above, there is ample evidence that late payments hamper the free circulation of 
goods  and  services  within  the  Internal  Market.  Given  the  insufficient  action  by  the 
Member  States  and  the  persistent  damaging  effects  of  late  payment  on  the  smooth 
functioning  of the Single Market, it now appears that a binding instrument  in the form  of a 
Directive  should  be  proposed.  Taking  into  account  the  principle  of  subsidiarity  in 
Article 3b  of  the  Treaty,  it  is  now  apparent  that  the  objective  of  reducing  late  payment 
within  the  Single  Market  cannot  be  sufficiently  achieved  by  the  Member  States  acting 
individually and can be better achieved by action by the Community as a whole. 

Therefore  the  Commission  considers  that  the  adoption  of  Community  legislation  in  the 
form  of  a  Directive  is  in  conformity  with  the  principle  of  subsidiarity  as  laid  down  in 
Article 3b of the Treaty. 

European Payment Habits Survey  1996, Intrum Justitia, Amsterdam, April 1997. 
See the Annex of the Communication of 9 July  1997 for a comparison  of the current law and practice in 
EEA countries. 
SEC(97)  1 final, 4 June  1997, pp. 8 and 38. 

The Commission's proposal contains a number of minimum requirements. In particular, it 
does not  aim at full  harmonization  of national  law in the fields covered by this Directive, 
but leaves the Member States a wide margin of appreciation. Wherever possible, it aims at 
mutual  recognition  of Member  States' provisions. The proposed  provisions  are limited  to 
what  is necessary  to achieve the proper  functioning  of the Internal  Market.  The Directive 
is therefore  in accordance with  the principle of proportionality  as contained  in Article 3b, 
paragraph 3, of the Treaty. 

3. 

THE IMPACT OF LATE PAYMENT ON SMEs 

SMEs  are  the  hardest  hit  by  their  clients'  failure  to  pay  on  time,  because  of  the 
vulnerability  of their  cash  flow,  their frequent reliance  on  a limited  number  of  suppliers 
and their weakness vis-à-vis the large firms that they usually supply. The financial  costs of 
late  payment  for  SMEs  are particularly  high,  with  cash-flow  needs  having  to  be  met  by 
short-term  bank 
interest  charges.  The 
administrative costs of pursuing debts are disproportionately  high  for SMEs, which do not 
have  specialized  staff  or  the  time  or  manpower  to  manage  outstanding  claims.  SMEs 
therefore stand most to gain from effective  legislation tackling late payments. 

loans  or  overdrafts  with  relatively  high 

There  have  been  some  concerns  that  legislation  to  tackle  late  payments,  for  example  by 
introducing  a  strong  statutory  right  to  interest,  might  backfire  on  SMEs.  However,  the 
example of Nordic countries shows that SMEs have not suffered  from  a high  interest  rate 
on  late  payment,  but  have  benefited  from  it.  The  great  majority  of  businesses  in  Nordic 
countries  do  in  fact  exercise  their  right  to  interest  on  late  payments,  including  small 
businesses8.  As  SMEs  are  owed  more  money  than  they  owe  themselves  to  larger 
businesses,  SMEs  would  be  net  beneficiaries  from  higher  statutory  interest  rates  on  late 
payment  as  well  as  from  reductions  in  the  overall  volume  of  debt.  A  survey  of  private 
businesses  in the UK in  1994 showed that SMEs were owed twice as much trade credit as 
they  themselves  owed  to  other  economic  operators  (GBP 40 billion  trade  credit  owed  to 
private businesses compared to GBP 20 billion owed by them). The proportion  is the same 
for  total  amounts  of  late payment,  with  GBP 20 billion  late  trade  credit  owing  to  SMEs 
and GBP  10 billion late trade credit owed by SMEs. This means that  if late payment  were 
to be  eliminated,  SMEs in the UK alone would  benefit  by the timely  reception  of the net 
total of GBP  10 billion9. 

The speed with which creditors can recover claims has a big impact on SMEs'  liquidity. It 
is  therefore  important  that  they  have  at  their  disposal  accelerated  recovery  procedures 
which permit them to obtain a writ of execution within a short period of time. This would 
enable  SMEs  to  benefit  from  the  functioning  of  the  Internal  Market  to  a  much  higher 
degree than is at present the case. 

The  same  is  true  for  simplified 
in  most 
Member States  for  the  recovery  of  small  debts  (Small  Claims  Court,  juge  de  paix, 
Amtsgericht, etc.). It  is the  ease  of  access  to  these  Courts,  which  makes  them  attractive 
for SMEs. 

legal  procedures  which  are  available 

In  Sweden,  94%  of  businesses  always  or  sometimes  charge  interest  on  late  payments,  with 
88%  in Finland,  83%  in  Norway  and  79%  in  Denmark  (source:  European  Business  Survey, 
Grant Thonton International, London, May  1997, page 24). 
Source: Forum of Private Business, London, 31 March  1994. 

4. 

THE PUBLIC SECTOR 

In  many  countries  the  public  sector  is  one  of  the  worst  payers10.  There  are  two  main 
reasons why special measures for this sector are necessary. 

First,  late  payment  by  public  authorities  sets  a bad  example  to  all  economic  operators. 
Public bodies have the obligation to serve the general interest before their own and should 
observe  strict  discipline  in  paying  their  suppliers.  As  part  of  the  policy  to  speed  up 
payments  in  the  Union,  public  administrations,  which  through  the  volume  of  their 
purchases exert a considerable impact on the economy, should take the lead and carry the 
entire economy along in improving payment practices. 

Secondly,  there  is  an  imbalance  between  the  parties.  A  large  number  of  firms  are 
dependent  on  public  contracts,  especially  in  certain  industries  (for  example  construction 
and  defence),  and  fear  losing  their  only  or  main  client.  Because  of  their  respective 
bargaining  positions  and  the  public  sector's  own  rules  regarding  payments  conditions 
which  do  not  allow  or  encourage  negotiations  on  payments  conditions,  firms  cannot 
genuinely negotiate with the public sector. 

The  written  comments  and  the  public  hearing  referred  to  in  point  6  below  showed 
unanimous  support  in  favour  of  Community-wide  action  to  tackle  the  problem  of  late 
payments by the public sector. 

For  payments  executed  by  Community  institutions,  which  are  not  covered  by  this 
Directive, the Commission will make appropriate proposals aiming at a rules equivalent to 
those applied to public authorities in this Directive. 

5. 

RECENT INITIATIVES 

The Commission's  Recommendation  of  12 May  1995 on payment  periods  in  commercial 
transactions11 invited Member States to tackle the problem of late payments. However, the 
Commission's  Communication  of 9 July  199712 showed  that  some action  had  been  taken 
in  only  a  limited  number  of  countries  to  improve  the payments  situation  between  firms. 
Moreover,  the  latest  statistics  indicated  that  average  payment  times  in  Europe  in  1996 
lengthened,  with  all  payment  being  on  average  15  days  late.  The  Communication 
concluded  that  the  Commission  would  make  proposals  for  the  minimum  requirements 
which should be included into national legislation in order to combat late payment. 

There  have  been  calls  from  both  the  European  Parliament  and  the  Economic  and 
Social Committee  for  stronger,  Community-wide  action.  The  European  Parliament,  in  a 
resolution  of  4  July  199613,  called  on  the  Commission  to  consider  transforming  its 
Recommendation  into  a proposal  for  a Directive  as soon  as possible.  The  Economic  and 

10  Payment times averaging 307 days by public hospitals to businesses supplying health equipment  in Italy 
and  305  days  in  Spain  have  been  reported.  Source:  European  Diagnostic  Manufacturers  Association, 
October 1997. 
OJ L 127, 10.6.1995, p. 19, and for the Communication, OJ C  144, 10.6.1995, p. 3. 
OJC216,  17.7.1997, p. 10. 
OJC 211,22.7.1996, p. 42. 

Social Committee, in an opinion of 29 May  199714, proposed  maximum  payment  periods 
and interest on late payments by the public authorities. 

6. 

CONSULTATION 

The  Commission  consulted  interested  parties  on  the  best  way  forward  to  combat  late 
payments in Europe, with both written responses to the July  1997 Communication and at a 
public  hearing  on  late  payments  held  in  Brussels  on  7  October  1997.  There  was  a  very 
strong response in favour  of Community-wide action to create a level playing field within 
the  Single  Market  for  the  non-respect  of  contractual  payment  periods.  More  than 
one hundred  written responses were received, mainly from national  trade  associations, as 
well as from European organizations, including those representing businesses, lawyers and 
debt collection agencies. 91 (80%) were in favour  of EU legislation  on late payments. The 
Commission  also  organized  a  public  hearing  on  7  October  1997,  where  more  than 
200 people  participated.  There  was  also  strong  support  for  EU  legislation  at  the  public 
hearing,  including  from  members  of  the  European  Parliament  and  the  Economic  and 
Social Committee. 

The responses showed strong support for a right to interest on late payments with a rate of 
interest set high enough to deter late payers. There was also strong support for the right  for 
the creditor to be compensated  for the full  costs of pursuing  debts, such as  administrative 
and  legal  costs.  All  those  who  commented  on  the  public  sector  were  in  favour  of 
legislative action,  for  example setting maximum payment  times and  an automatic right to 
interest  for  late payments  by the public  sector.  There was  also unanimous  support  for  an 
EU-wide  retention  of  title  clause.  A  high  proportion  of  responses  favoured  simplifying 
redress procedures. 

7. 

THE DIRECTIVE: ARTICLES 

Article  1 : Scope 

The Directive applies to debts in all commercial  transactions, i.e. between businesses, and 
between  businesses  and  the  public  authorities.  It  applies  to  all  businesses,  including 
incorporated  and unincorporated businesses and the self-employed  who carry on a trade or 
profession  of  any  kind.  Thus,  the  Directive  does  not  apply  to,  nor  prejudge  future 
measures in the area of consumer credit. 

Article 3: Due date, interest and compensation  for the damage incurred 

The majority  of SMEs conduct trade without written contracts, and it is primarily  for them 
that this Directive is being proposed. In the absence of a written contract, or if the contract 
or general conditions of sale are silent on the due date for payment, it is necessary to have 
a clear subsidiary  legal provision  for a statutory  payment period. The time  limit  proposed 
here is 21 davs from the date of the invoice (paragraph  1(a)). That follows the best practice 
in Nordic countries, where contractually agreed  credit periods average in practice  19 days 
(Finland)  and 21 days (Norway)15. The rule docs  not  infringe  the principle  of  contractual 
freedom,  as the statutory  payment  period  of 21 days would  only  apply  when  the payment 

14  CES 607/97 of 29 May  1997, OJ C 287, 22.9.1997, p. 92. 
15  See European Payment Habits Survey  1996, Intrum Justitia, Amsterdam, April 1997. 

period  had  not  been  specified  in  the  contract.  Nevertheless,  it  would  -  in  the  course  of 
time - encourage the parties to reduce their present payment periods. 

Paragraph  1(c)  gives  the  creditor  the  statutory  right  to  interest  on  late  payment.  If  the 
Statutory  right  to  interest  is  to  have  a  deterrent  effect  and  is  to  provide  adequate 
compensation  for being paid  late, the rate of interest needs to be set at a sufficiently  high 
level.  In other words, it  should  be  at  least  as expensive  to borrow  money  by  paying  late 
than  to  borrow  from  banks  or  other  lenders  at  commercial  interest  rates.  At  present, 
however, the level of the statutory interest rate is far too low in almost  all Member  States 
compared  to  typical  commercial  interest  rates  on  unforeseen  bank  overdrafts16.  This 
situation encourages debtors to prefer  suppliers' credit over bank loans to the detriment  of 
creditors.  While  suppliers'  credit  is  perfectly  acceptable  as  long  as  it  has  been  agreed 
between the parties, it becomes an unacceptable problem both for individual  suppliers and 
with  macro-economic  dimensions  if  the  law  encourages  debtors  to  exceed  contractually 
agreed  credit  periods  unilaterally.  The  situation  is  particularly  serious  for  SMEs  who 
have  more  difficulty  in  obtaining  bank  loans  when  their  cash-flow  is  disrupted  by 
late payments. 

Paragraph  1(e) therefore  aims to  set a minimum  rate  for  the  statutory  right  to  interest  in 
Member  States. It leaves Member  States the flexibility  of setting  a higher rate  in order to 
reflect  typical commercial interest rates in each country. It also fully  respects the principle 
of  contractual  freedom,  as  the  parties  to  an  individual  transaction  would  be  free  to 
negotiate  a higher or a lower rate  than the  statutory  rate  applicable  in the  Member  State. 
The statutory rate applies only if no other rate has been specified  in the contract  or in the 
general  conditions  of sale. Nevertheless,  the Commission  believes  that  a higher  statutory 
interest rate would have the effect  of reducing  late payment. The experience of the Nordic 
countries  where  statutory  interest  rates are twice as high  as in  most  other  Member  States 
shows  that  this  has  had  the  effect  of  drastically  reducing  payment  delays,  although  the 
high  statutory  interest  rates  are  not  mandatory.  In  fact,  the  statutory  rate  has  become 
standard  commercial  practice  in  these  countries  where  a  very  high  proportion  of  all 
businesses  actually  claim  interest  on  late payments.  The high  statutory  rate  has  certainly 
facilitated  the  creditor's  claim  for  interest  in  cases  where  there  is  no  contract  or  the 
contract is moot on this point. It also strengthens the seller's hand in negotiations about the 
level of interest should the buyer wish to fix a lower rate. 

The mechanism  for  setting the statutory rate also varies between  countries. The  objective 
should be to have a mechanism  which allows the statutory  rate on  late payments  to track 
typical  commercial  interest  rates.  In  Sweden,  for  example,  the  mechanism  is  the  central 
bank discount rate plus 8 percentage points. The rate should also be easily ascertainable by 
citizens, and so be based  on an interest rate which can be easily  identified  for example in 
the financial  press. Moreover, the formula  should  be such that the rate is not changed  too 
frequently, but is relatively stable. 

In order to meet these different  criteria, the proposal is that the minimum  statutory rate  for 
late  payments  should  be  the  sum  of  two  elements.  The  first  element  is  a  reference  rate 
which tracks movements in European market rates. The Commission considered  a number 
of  possibilities  for  the  reference  rate  and  concluded  that  the  rate  which  best  meets  the 

16  See the summary in the first  and third columns of the second table in the Annex of the  Communication 

of 9 July 1997. 

criteria set out above is the tender (repo) rate of the European  Central Bank.  This will be 
one  of  the  major  policy  rates  set  by  the  European  Central  Bank,  aimed  at  controlling 
short-term  market  rates.  It  will  have  effect  as  from  1 January  1999.  For  Member  States 
which  do  not  participate  in  the  third  phase  of  Economic  and  Monetary  Union,  the 
reference rate shall be the equivalent rate set by their central bank. 

The second element is a margin to ensure that the overall minimum statutory rate is set at a 
sufficiently  high  level to dissuade  late payers. The margin  of 8 percentage points  follows 
the  example  of  Sweden,  which  is  generally  recognized  as  having  efficient  and  effective 
legislation on interest on late payments. The overall result should be that the statutory rate 
of interest  on late payments  set by Member States also compensates the average  SME  for 
financing costs which are equivalent to the rate on unforeseen bank  overdrafts17. 

Apart  from  the right to interest, it is also essential to recognize the right  for the creditor to 
be  fully  compensated  for  the other  costs of pursuing  debts, such  as the administrative  or 
legal  costs.  The  right  to  compensation  for  these  costs  varies  between  Member  States18. 
Paragraph  1(g) aims to ensure that such costs are fully recoverable from the debtor. 

Article 4: Retention of title 

Retention  of  title  is  a  legal  mechanism  which  delays  the  transfer  of  ownership  of  goods 
until  the purchase price  has been  paid  in  full.  In the Communication  of  9 July  1997. the 
Commission  identified  retention  of  title  as  one  area  where  action  at  Community  level 
could be beneficial  for exporters and for reducing late payments. The problem at present  is 
that there  are different  legal requirements  in the Member  States, so that  exporters  cannot 
rely  on  a single retention  of title clause  for  all  Community  countries.  In  the  consultation 
exercise  following  the  Communication  of  9 July  1997  there  was  unanimous  support  for 
Community legislation on retention of title by all those who commented on this point. 

This  Article  aims  to  provide  a  uniform  retention  of  title  clause  applicable  in  all 
Member States. It does not aim at full  harmonization  of national  law in this area. It rather 
obliges  Member  States  to  recognize  a retention  of  title  clause  if  a  number  of  minimum 
requirements  are  met.  It  does  not  interfere  with  the  rules  protecting  a  third  bona  fide 
purchaser.  The  Article  does  not  aim  at  making  retention  of  title  clauses  mandatory,  but 
respects the parties' freedom of contract. 

Article 5: Accelerated recovery procedures for undisputed debts 

The  objective  of  this  Article  is  to  introduce  and  to  improve  accelerated  recovery' 
procedures  for  undisputed  debts. Procedures  of  this  kind  (e.g.  the  "summons  production 
procedure"  in  the  UK,  the  "injonction  à  payer"  procedure 
the 
"Mahnverfahren" in Germany) already  exist  in a considerable  number of Member  States. 
The advantages of such procedures are that they are rapid, do not involve the  intervention 
of a judge (unless the debt is disputed) and involve few formalities  and little cost. As about 
90%  of  the  cases  are  undisputed,  this  would  considerably  reduce  the  number  of  cases 

in  France  and 

17  See the summary of commercial  interest rates  for unforeseen  bank overdrafts  in the third  column  of the 

second table in the Annex of the Communication of 9 July 1997. 

Ix  See  the  summary  in  the  fifth  column  of  the  fourth  table  in  the  Annex  of  the  Communication  of 

9 July  1997. 

which judges would have to deal with. This would free valuable resources which could be 
used to speed up ordinary legal proceedings. 

If  the  debtor  contests  the  debt  in  the  course  of  these  proceedings,  the  normal  rules 
regarding  procedure  and representation  will  apply,  i.e.  the procedure  will  then  either  fall 
under  Article  6 (if  the  debt  is below  the threshold  for  small  debts)  or  will  be  subject  to 
national rules dealing with the procedure for larger debts. 

In the Commission's  view, the accelerated recovery procedures  should be  available  in all 
Member  States. These procedures  would  be particularly  useful  for  the  recovery  of  debts 
when the debtor and the creditor are in different  Member States. In such cases it would be 
advisable  for  the  creditor  to pursue  the  debtor  in the  debtor's  Member  State,  so  that  the 
writ of execution (titre exécutoire, Vollstreckungsbescheid) can be enforced  without delay. 
The presently widespread practice of suing the debtor in the creditor's country of residence 
leads to long delays in the execution  of the judgement  obtained.  Creditors  have  hesitated 
up to now to address themselves to the Courts of the debtor's country of residence because 
of  a  lack  of  confidence  in  their  speed  and  their  accessibility  for  foreign  creditors.  This 
unsatisfactory  state of affairs  is incompatible with  the completion  of the  Internal  Market. 
Creditors in all Member States must have available similar recovery  procedures which  are 
fast, easily accessible and in which they have confidence. 

The  Commission's  proposals  on  simplified  legal procedures  and  on  accelerated  recovery 
procedures  for  commercial  debts  represent  a  first  stage  in  the  wider  debate  on  legal 
procedures  in the  European  Union.  They  do not  preclude  any  further  proposals  from  the 
Commission,  which  might  emerge  following  the  consultation  on  legal  procedures 
launched  in  its  Communication  "Towards  improving  efficiency  in  the  obtention  and 
execution of decisions in the European Union"19. 

Article 6: Simplified  legal procedures for small debts 

For  debts  below  the  threshold  of  ECU 20 000,  the  creditor  should  have  the  choice  of 
pursuing  debts  rapidly,  efficiently  and  at  minimum  cost  through  simplified 
legal 
procedures, irrespective  of whether they  are disputed  or not. These procedures  tend  to be 
conducted  in local Courts, do not involve the presence of a bailiff  or a lawyer and tend  to 
be  fairly  informal.  As  with  accelerated  recovery  procedures,  the  Commission  takes  the 
view  that  such  procedures  should  be  available  for  creditors  in  all  Member  States,  in 
particular  for  debts  where  the  creditor  and  the  debtor  are  in  different  Member  States. 
Again the objective of the Article is to set the main principles underlying best practice. 

Article 7: Transparency in public procurement contracts 

The  Directives  on  public  procurement  contracts20  stipulate  that  notices  of  invitation  to 
tender  must  indicate  the  basic  arrangements  for  financing  and  payment.  However, 
Member States  interpret  this  requirement  differently,  and  payment  periods  are  often 
omitted  from  invitations to tender.  This Article therefore  aims to  strengthen  transparency 
in public procurement  contracts by requiring public  authorities  to indicate precise  details 
of  the  payment  periods  and  payment  deadlines  used  by  the  awarding  authority.  Public 

19  OJC33,  31.1.1998, p. 3. 
20  Council Directives 93/36/EEC, 93/37/EEC and 93/38/EEC of  14 June  1993, OJ L 199, 9.8.1993. 

procurement  contracts  are used  in a broad  sense here  and  are not  defined  by reference  to 
the public procurement Directives which only apply to contracts over a certain threshold. 

Article 8: Prompt payment, due date and automatic interest 

In view of the particular position of the public sector, the Commission takes the view that 
a  maximum  payment  period  by  the  public  sector  should  be  set.  A  maximum  payment 
period of 60 days is proposed here (paragraph  1). This is without prejudice  to any  shorter 
times  currently  in  effect.  Unlike  transactions  in  the private  sector  (see  Article  3(1)),  this 
maximum payment period could not be overridden by any provision in a contract with the 
public  authorities,  except  if  it  was  agreed  between  the  parties  that  a  shorter  time  limit 
should apply. The date from which the 60 day period starts to run is otherwise the same as 
for  all  other  transactions  (see Article  3, paragraphs  1(a) and  1(b)), i.e. normally  from  the 
date of invoice. In the absence of a written contract, or if there is a written contract but it is 
silent  on the payment  period,  the  21-day  rule  set  out  in  Article  3, paragraph  1(a), would 
apply equally to transactions with the public sector. 

Paragraph  2 provides for interest on late payment by public authorities. The rate of interest 
is the same as for other transactions  (see Article 3, paragraphs  1(d) and  1(e)). In addition, 
the payment  of interest  is to be made automatically  by the public  authorities, without  the 
need  for  the  creditor  to  make  a  claim.  This  is  in  line  with  best  practice  in  the 
Member States (F, B, IRL) and gives public authorities a strong financial  incentive to pay 
on time. 

Article 9: Committee 

The setting  up of a Committee with a view to reviewing the functioning  of this  Directive 
seems necessary, as none of the existing committees is capable of fulfilling  this task. 

10 

Proposal for a 
EUROPEAN PARLIAMENT AND COUNCIL DIRECTIVE 

combating late payment in commercial transactions 

(Text with EEA relevance) 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article  100a thereof, 

Having regard to the proposal from the Commission21, 

Having regard to the opinion of the Economic and Social Committee22, 

Acting in accordance with the procedure laid down in Article  189b of the Treaty23, 

Whereas the European Parliament  in its Resolution24 on the Integrated  Programme 
in favour  of SMEs and the craft  sector25, emphasized  that  the Commission  should 
forward proposals to deal with the problem of late payment; 

Whereas  on  12  May  1995  the  Commission  adopted  a  Recommendation  on 
payment periods in commercial transactions26; 

Whereas  the  European  Parliament 
the  Commission 
in 
Recommendation  on  payment  periods  in  commercial  transactions27  called  on  the 
Commission  to  consider  transforming  its  recommendation  into  a  proposal  for  a 
Council Directive to be submitted as soon as possible; 

its  Resolution  on 

Whereas on 29 May  1997 the Economic and Social Committee adopted an opinion 
on the Commission's  Green Paper on Public procurement  in the European  Union: 
Exploring  the  Way  Forward28,  recommending  maximum  payment  periods  and 
interest on late payments by public authorities; 

Whereas  on  4  June  1997  the  Commission  published  an  Action  Plan  for  the 
Single Market29,  which  underlined  that  late  payment  represents  an  increasingly 
serious obstacle for the success of the Single Market; 

1. 

2. 

3. 

4. 

5. 

21 

22 

23 
24  OJC 323, 21.11.1994, p. 19. 
25  COM(94) 207 final of 3 June  1994. 
26  OJL127,  10.6.1995, p. 19. 
27  OJC 211,22.7.1996,p. 43. 
28  OJC287, 22.9.1997,p. 92. 
29  SEC(97)  1 final, 4 June  1997, pp. 8 and 38. 

11 

6. 

7. 

8. 

9. 

Whereas on  17 July  1997 the Commission  published  a Report  on late payments in 
commercial  transactions30,  summarizing  the results of an evaluation  of the  effects 
of the Commission's Recommendation of 12 May 1995; 

Whereas  heavy  administrative  and  financial  burdens  are  placed  on  businesses, 
particularly  small  and  medium-sized  ones,  as  a  result  of  late  payment;  whereas 
moreover,  late payments are a major  cause of insolvencies  threatening  the survival 
of businesses and result in numerous job losses; 

Whereas  the  differences  between  the  payment  rules  and  practices  in  the 
Member States  constitute  an  obstacle  to  the  proper  functioning  of  the  internal 
market; whereas  a creditor who needs to collect  receivables from debtors  situated 
in  several  Member  States  is  confronted  with  widely  differing  rules  of  national 
legislation making it difficult,  time consuming and costly for him to do so; 

Whereas  this  has  the  effect  of  considerably  limiting  commercial  transactions 
between  Member  States;  whereas  this  is  in  contradiction  with  Article  7a  of  the 
Treaty  as  entrepreneurs  should  be  able  to  trade  throughout  the  Internal  Market 
under  conditions  which  ensure  that  transborder  operations  do  not  entail  greater 
risks  than  domestic  sales;  whereas  it  would  lead  to  distortions  of  competition  if 
different  rules applied to domestic and transborder operations; 

10.  Whereas  the  most  recent  statistics  indicate  that  there  has  been,  at  best,  no 
improvement  in  late payments  in  many  Member  States  since  the  adoption  of  the 
Recommendation of 12 May  1995; 

11.  Whereas,  in  accordance  with  the  principle  of  subsidiarity  and  the  principle  of 
proportionality  as  set  out  in  Article  3b  of  the  Treaty,  the  objective  of  combating 
late  payments  in  the  internal  market  cannot  be  sufficiently  achieved  by  the 
Member States  acting  individually  and  can,  therefore,  be  better  achieved  by  the 
Community;  whereas  this  Directive  confines  itself  to  the  minimum  required  in 
order to achieve those objectives and does not go beyond what is necessary  for that 
purpose; 

12.  Whereas  late  payment  constitutes  a  breach  of  contract  which  has  been  made 
financially attractive to debtors in most Member States by low interest rates on late 
payments  and/or slow redress procedures; whereas  a  decisive  shift  is necessary  to 
reverse this trend  and the  consequences  of  late payments must  be  such  as both  to 
discourage late payment and to fully  compensate creditors for the costs incurred; 

13.  Whereas the use of retention of title clauses as a means of speeding up payment  is 
at  present  constrained  by  a  number  of  differences  in  national  law;  whereas  it  is 
necessary to ensure that creditors  are in a position  to exercise the retention  of title 
throughout the Community, using a single clause recognized  by all Member States; 

30  OJC 216, 17.7.1997, p. 10. 

12 

14.  Whereas  the  consequences  of  late  payment  can  be  dissuasive  only  if  they  are 
accompanied  by redress procedures which are rapid,  effective  and  inexpensive  for 
the  creditor;  whereas  in  conformity  with  the  principle  of  non-discrimination 
contained  in  Article  6  of  the  Treaty,  these  procedures  should  be  available  to 
creditors from all Member States irrespective of their residence; 

15.  Whereas  public  authorities  handle  a  considerable  volume  of  payments  to 
businesses; whereas strict payment discipline on the part of these authorities would 
have  a  beneficial  trickle-down  effect  on  the  economy  as  a  whole;  whereas  for 
payments executed by the Commission  it has already been decided  to give certain 
creditors the right to receive default interest on late payments; 

16.  Whereas for the purposes of the implementation  of this Directive, the  Commission 

should be assisted by a committee of an advisory nature, 

HAVE ADOPTED THIS DIRECTIVE: 

CHAPTER I 

Article 1 
Scope 

The  provisions  of 
commercial transactions. 

this  Directive 

shall  apply 

to  all  payments  made 

in 

Article 2 
Definitions 

For the purposes of this Directive: 

1. 

2. 

3. 

4. 

"commercial  transactions"  means  transactions  between  two  or  more  natural  or 
legal  persons  carrying  on  a  trade  or  profession  acting  in  the  course  of  their 
business, or between such persons and public authorities, which lead to delivery of 
goods or provision of services for remuneration; 

"late  payment"  means  failure  to  observe  the  contractual  or  statutory  terms 
of  payment; 

"retention  of  title"  means  retention  by  the  seller  of  title  to  the  goods  in  question 
until the buyer has paid the price in  full; 

"public authorities" means the State, regional or local authorities, bodies  governed 
by public law, or associations formed  by one or more of such authorities or bodies 
governed by public law. A body is considered  to be governed  by public  law where 
it  is  established  for  the  specific  purpose  of  meeting  needs  in  the  general  interest, 
not  being  of  an  industrial  or  commercial  nature,  has  legal  personality,  and  is 
financed  for  the  most  part  by  the  State,  or  regional  or  local  authorities,  or  other 
bodies governed  by public  law, or is subject  to management  supervision  by  those 
bodies, or has an administrative, managerial or supervisory board more than half of 
whose members  are appointed  by  the  State, regional  or  local  authorities,  or  other 
bodies governed by public law; 

13 

5. 

"public procurement contracts" means contracts for pecuniary interest concluded in 
writing between a natural or legal person and public authorities. 

CHAPTER II 

Article 3 
Due date, interest and compensation for the damage incurred 

1. 

Member States shall ensure that: 

(a) 

(b) 

(c) 

(d) 

(e) 

(f) 

(g) 

the  due  date  for  the payment  of debts  shall  not  be  more  than  21  calendar 
days from the date of the invoice, unless otherwise specified  in the contract 
or in the seller's general conditions of sale; 

in  the  absence  of  an  invoice  or  if  the  date  of  the  invoice  cannot  be 
determined with certainty or if the date of the invoice is earlier than the date 
of delivery, the due date shall be calculated  from  the date of delivery of the 
goods or services; 

the  creditor  shall  be  entitled  to  claim  interest  from  the  debtor  on  any 
outstanding  amount when the due date as determined  under points  (a) and 
(b) has been exceeded without the creditor having received the amount due; 

interest  shall  accrue  automatically  from  the day  after  the due date without 
the necessity of a reminder; 

the  level  of  interest  for  late  payment  (the  "statutory  rate"),  which  the 
creditor  is  entitled  to  claim,  shall  be  the  sum  of  the  tender  (repo)  interest 
rate  of  the  European  Central  Bank  (the  "reference  rate")  plus  at  least 
8 percentage  points  (the  "margin"),  unless  otherwise  specified  in  the 
contract  or  in  the  seller's  general  conditions  of  sale;  for  Member  States 
which  do  not  participate  in  the  third  phase  of  Economic  and  Monetary 
Union, the reference rates referred  to above shall be the equivalent  rates set 
by their central banks; 

the statutory rate for interest on late payment  shall change automatically in 
accordance with changes to the reference rate mentioned in point (e); 

in addition  to the right to interest, the creditor shall be entitled  to claim  full 
compensation  from  the debtor for the damage incurred. 

2. 

The margin referred  to in paragraph  1(e) may be modified  by the Commission  in 
accordance with  the procedure  referred  to  in Article  9 if it becomes  apparent  that 
the statutory rate is no longer sufficiently  high to discourage the buyer from  paying 
late and to compensate the seller  for any loss incurred  as a result  of  late payment, 
in particular for any interest he would have to pay on overdraft  credit. 

14 

Article 4 
Retention of title 

1. 

Member States shall ensure that the seller retains title if he notifies the buyer of his 
intention of doing so in writing no later than the date of delivery of the goods. 

2. 

3. 

1. 

2. 

3. 

4. 

5. 

Once the due date has passed without the buyer having paid, the  seller may  claim 
that  the  goods  in  question  be  returned  to  him.  As  soon  as  the  buyer  takes 
possession  of the goods, he becomes responsible  for  any damage to or loss of the 
goods. A valid  notification  may be made  in the  seller's  standard  contract,  on  the 
invoice, or in an individual contract. 

Member States shall recognize the validity of the clauses contained in the Annex or 
of clauses having equivalent  effect. 

Paragraph  1  shall apply only to debts payable in a single instalment. 

Member  States  shall  define  the  effect  of  the  retention  of  title  clause  as  regards 
those aspects not covered by this Directive and in particular as regards the effect  on 
third parties acting in good faith. 

Article 5 
Accelerated recovery procedures for undisputed debts 

Member States shall ensure that there is an accelerated debt recovery procedure  for 
undisputed debts. 

This procedure shall apply irrespective of the amount of the debt. 

This procedure shall be available to creditors from all Member States,  irrespective 
of their place of residence. 

The creditor shall be able to choose whether or not he wishes to be represented by 
a third person. 

The procedure before  the court  shall be formulated  in such a way that  a period  of 
60 calendar  days  is not  exceeded from the receipt  of the  creditor's  request  to  the 
time when the writ of execution or equivalent document becomes enforceable. This 
period is without prejudice to: 

(a) 

the application of the rules governing notification  or service; and 

(b) 

the rights of the defendant  to dispute the debt. 

Article 6 
Simplified  legal procedures for small debts 

Member  States  shall  ensure  that  simplified  procedures  are  available  for  debts  up  to  a 
threshold,  which  shall  not  be  less  than  ECU  20 000.  These  procedures  shall  provide  for 
simple, low-cost methods for taking legal action for the settlement of debts. 

15 

This sum can if necessary be modified  by the Commission to reflect  changing  economic 
conditions in accordance with the procedure referred to in Article 9. 

These  procedures  shall  be  available  to  creditors  from  all  Member  States  irrespective  of 
their place of residence. 

CHAPTER III 

Article  7 
Transparency in public procurement contracts 

Member States shall ensure that public procurement contracts contain precise details of the 
payment periods and deadlines  applied by the public authorities. In particular, time limits 
shall  be  fixed  for  the  completion  of  pre-payment  administrative  formalities,  such  as 
public works reception procedures. 

Article 8 
Prompt payment, due date and automatic interest 

Member States shall ensure that: 

1. 

2. 

the  due  date  for  the  payment  of  contractual  debts  by  the  public  authorities  as 
determined  under  Article  3(1 )(a)  and  (b)  does  not  exceed  60  calendar  days;  the 
contract shall in no circumstances override that maximum payment period; 

a creditor shall be entitled to interest from the public authority on any outstanding 
amount when the due date has been exceeded; the interest shall be calculated  as set 
out  in  Article  3(1 )(d)  and  (e),  and  shall  be  paid  automatically  by  the  public 
authority without the necessity of a claim; 

3. 

the public  authority  is not permitted  to request  or require  that  the creditor  waives 
any of the rights referred to in this Article. 

CHAPTER IV 

Article 9 
Committee 

For  the  purposes  of  reviewing  the  functioning  of  this  Directive  and  in particular  for  the 
cases  mentioned  in  Article  3(2)  and  Article  6,  the  Commission  shall  be  assisted  by  a 
committee  of  an  advisory  nature  composed  of  the  representatives  of  the  Member  States 
and chaired by the representative of the Commission. 

The  representative  of  the  Commission  shall  submit  to  the  committee  a  draft  of  the 
measures  to be taken. The committee  shall  deliver  its opinion  on the draft,  within  a time 
limit  which  the  chairman  may  lay  down  according  to  the  urgency  of  the  matter,  if 
necessary by taking a vote. 

The opinion  shall be recorded  in the minutes; in  addition,  each  Member  State  shall  have 
the right to ask to have its position recorded in the minutes. 

16 

The Commission  shall take the utmost account of the opinion delivered by the committee. 
It  shall  inform  the  committee  of  the  manner  in  which  its  opinion  has  been  taken  into 
account. 

Article 10 
Transposition 

1. 

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions  necessary  to  comply  with  this  Directive  by  31  December  2000  at  the 
latest. They shall forthwith  inform the Commission thereof. 

When Member States adopt these provisions, these shall contain a reference to this 
Directive  or  shall  be  accompanied  by  such  reference  at  the  time  of  their  official 
publication. The procedure for such reference shall be adopted by Member States. 

Member States may maintain or bring into force provisions which are stricter than 
the provisions necessary to comply with this Directive. 

Member  States  shall  communicate  to  the  Commission  the  text  of  the  main  laws, 
regulations  or  administrative  provisions  which  they  adopt  in  the field covered  by 
this Directive. 

2. 

3. 

Article 11 
Entry into force 

This Directive shall enter into force  on the twentieth day following  that of its publication 
in the Official Journal of the European Communities. 

Article 12 
Addressees 

This Directive is addressed to the Member States. 

Done at Brussels, 

For the European Parliament 
The President 

For the Council 
The President 

17 

Annex 

List of clauses to be recognized by Member States for the purposes of Article 4 

ES:  "El vendedor conservarâ la propiedad de los bienes hasta el pago." 

DA:  "Varen forbliver  saelgerens ejendom, indtil den er betalt." 

DE:  "Die Ware verbleibt bis ziir Bezahlung im Eigentum des Verkâufers." 

EL:  "O 7icùXrjxf|ç 7tapaKpaxei TTJV KupiÔTT|xa xcov ayaOœv p.éxpi va  eÇocpXnGei xo xiunuâ 

xouç." 

EN:  "The goods remain the property of the seller until payment." 

FR:  "Les marchandises restent la propriété du vendeur jusqu'au paiement." 

IT:  "Le merci restano di propriété del venditore fino al pagamento." 

NL:  "De waren blijven tot de betaling eigendom van de verkoper." 

PT:  "O vendedor conservarâ a propriedade dos bens até ao momento do pagamento." 

FI: 

"Tavara on myyjân omaisuutta, kunnes kauppahinta on maksettu." 

SV:  "Varorna fôrblir sâljarens egendom tills de betalats." 

18 

BUSINESS IMPACT ASSESSMENT 

THE IMPACT OF THE PROPOSAL ON BUSINESS 

with special reference to small and medium-sized businesses (SMEs) 

Title of Proposal: 

Proposal for a European Parliament and Council Directive 
combating late payment in commercial transactions 

Document reference number: 97012. 

THE PROPOSAL 

Taking account  of  the principle  of  subsidiarity,  why  is  Community  legislation 
necessary in this area and what are its main aims? 

This proposal contains a package of measures to combat late payment  in commercial 
transactions  in the European  Community.  The measures  apply  to  all  late  payments 
between businesses, and between the public sector and businesses. They apply to all 
businesses, 
the 
self-employed  who carry on a trade or profession  of any kind. 

incorporated  and  unincorporated  businesses  and 

including 

The  general  aim  of  this  proposal  is  to  encourage  respect  of  contractually  agreed 
payment periods, for the benefit  of all businesses. It provides  a legal framework to 
deter  late  payers  from  paying  late,  to  give  rights  to  creditors  for  adequate 
compensation  when  they  are  paid  late  and  to  provide  or  improve  procedures  for 
recovering debts so that these procedures are efficient,  inexpensive and fast.  Finally, 
there  are  also  specific  measures  to  improve  the  payment  performance  of  the 
public authorities. 

There  is  evidence  that  late  payments  are  hindering  the  smooth  functioning  of  the 
Internal  Market31.  There  are  large  differences  between  payment  practices  in  the 
Community, and these differences  are deterring firms from  engaging  in cross-border 
trade.  The  differences  between  Member  States'  legislation  on  late  payments, 
different  redress procedures  and different  approaches to compensation  for  the  costs 
of  recovering  debts  are  also  acting  as  a  barrier  to  cross-border  trade.  Finally, 
differences  in payment times and problems of late payment are also damaging  firms' 
competitiveness32. 

31  See for example European Payment Habits Survey  1996, Intrum Justitia, Amsterdam, April  1997. 
32  See Commission  Report  on  late payments  in commercial  transactions,  OJ C  216,  17.7.1997, p.  10, in 

particular sections 3.1 and 3.2. 

19 

The  Commission's  Recommendation  of  1995  on  payment  periods  in  commercial 
transactions33 gave Member States the opportunity to tackle the problem themselves, 
in  the  form  of  a  non-binding  instrument.  However,  the  Commission's  report  of 
July  1997  concluded  that  there  had  been  insufficient  action  by  the  Member  States, 
and  that  further  measures  to  reduce  late  payments  in  the  Community,  such  as  a 
Directive,  should be proposed34.  The latest  statistics  also  indicate  that the problems 
of late payment have not improved in many Member States since the  Commission's 
Recommendation was issued35. 

Given  the  insufficient  action  by  the  Member  States  and  the  persistent  damaging 
effects  of  late  payment  on  the  smooth  functioning  of  the  Single  Market,  it  now 
appears  that  a  binding  instrument  in  the  form  of  a  Directive  should  be  proposed. 
Taking into account the principle of subsidiarity in Article 3b of the Treaty, it is now 
apparent that the objective of reducing late payment within the Single Market cannot 
be sufficiently  achieved by the Member  States acting individually  and can be better 
achieved by action by the Community as a whole. 

THE IMPACT ON BUSINESS IN GENERAL 

2.  Who will be affected by the proposal? 

There  are basically  three situations where businesses  in general  will  be affected  by 
the proposal: 

(a) 

(b) 

(c) 

When a business is paid late by another business; 

When a business pays another business late; 

When  a  business  is  paid  late  by  a  customer  (an  individual  person  rather 
than a business customer. 

According  to  a number  of  surveys, there  are wide  variations  between  contractually 
agreed  payment  times  and  actual  payment  times  in  EEA  countries36.  The  longest 
average payment times tend to be in Greece, Portugal and Italy. The shortest average 
payment  times  are in Norway, Finland  and  Sweden. The countries with  the  longest 
average  overdue  record  (i.e.  the  number  of  days  between  the  actual  payment 
period  and  the  contractual  credit  period)  are  Portugal,  Italy,  Belgium,  Greece, 
the Netherlands and the United  Kingdom. 

The  sectors  which  are  frequently  rated  as  the  worst  payers  in  Europe  tend  to  be 
construction,  the  public  sector,  transport/logistics,  retail/wholesale  and  primary 
industries.  By  contrast,  banking/insurance,  chemicals  and  telecommunications  are 
rated as the best paying sectors37. 

33  OJL127,  10.6.1995, p. 19. 
34  OJ C 216,  17.7.1997, sections 2.1 and 4. 
35  OJ C 216, 17.7.1997, section 2.2. 
36  See summary of recent statistics in OJ C 216, 17.7.1997, section 2.2. 
37 

European Payment Habits Survey  1996, Intrum Justitia, Amsterdam, April  1997. 

20 

Large  businesses  are  the  customers  which  tend  to  take  the  longest  to  pay  across 
Europe,  followed  by  the  public  sector  and  small  businesses.  Large  enterprises  are 
quoted as the type of customers which take the longest to pay in 32% of cases for the 
EU average, with the figures particularly high in Spain (49%) and Italy (41 %)38. 

One  survey  for  the  United  Kingdom  in  1994  found  the  highest  levels  of  total  net 
sums  outstanding  late  were  in  the  manufacturing,  construction  and  wholesale 
sectors,  with  the  lowest  levels  in  retail,  primary  industries  and  transport39.  There 
were  also  significant  regional  differences.  Another  recent  survey  for  the  UK 
confirmed  that  the  manufacturing  sector  had  the  worst  payment  record  (14.0% of 
payments on time), followed  by construction (20.4%) and wholesalers (20.6%), with 
the best payment  performance  by far  in the  financial  services  sector (31.6%)40. The 
survey  also  found  that  twice  as  many  small  businesses  paid  their  bills  on  time 
compared with larger companies (23.2% of small businesses paid on time compared 
to  13.8% of medium-sized businesses and 9.7% of large businesses). 

In  France,  net  borrowers  (i.e.  those  who  benefit  most  from  trade  credit)  are 
concentrated  in the retail  sector, particularly  in large-scale  food  distribution,  and  in 
the  wholesale,  automobile,  and  car  sales/repairs  sectors41.  The  amounts  of  trade 
credit  are  concentrated  in  large  businesses,  with  43% of  trade  credit  enjoyed  by 
businesses  with  more  than  500  employees  and  31%  by  businesses  with  more  than 
2 000 employees. Net  lenders  are more dispersed  in different  sectors  but  are  found 
mainly  in producers  of intermediary  goods  and plant  and  machinery,  the  wholesale 
sector  and  business  services.  57% of  trade  credit  is  given  by  firms  with  less  than 
500 employees.  Recent  trends  in  trade  credit  have  favoured  the  largest  enterprises 
and disadvantaged  SMEs. 

Finally, particularly  acute payment problems have been  reported  in the construction 
industry  in  Spain,  with  average  payment  times  of  215  days  by  large  construction 
firms to SMEs supplying construction materials42. There have also been very severe 
payment problems reported  for the suppliers of health equipment  to public  hospitals 
in Italy (average payment time of 307 days), Spain (305 days), Portugal and Greece, 
with wide regional variations43. 

The proposal will also set new requirements to ensure prompt payment by the public 
authorities in all Member States. 

3.  What will business have to do to comply with the proposal? 

For businesses generally, the provisions in the proposal relating to compensation  for 
late payment  (Article  3) will  introduce  new  rights  and  obligations.  Businesses  will 
have  to  respect  these  new  rights  and  obligations  which  aim  to  provide  adequate 
compensation  for  creditors  who  are  paid  late  and  to  deter  late  payers  from  paying 
late.  At  the  same  time,  the  proposals  fully  respect  the  principle  of  contractual 

38  European Business Survey, Grant Thornton International Business Strategies Ltd., spring  1997, p. 25. 
39  Forum of Private Business, London, 31 March 1994. 
40  Survey of the payment performance  in Britain, Dun & Bradstreet, London, October  1997. 
41  Observatoire des délais de paiement, cinquième rapport, Paris, septembre  1997. p. 10 
42  Confederation  of  Suppliers  of  Construction  Materials  (CEPCO),  Report  on  the  Spanish  Construction 

Industry, Madrid, September  1996. 

43  European Diagnostic Manufacturers  Association, October 1997. 

21 

freedom  so that  the parties to a contract  will remain free to negotiate  and  agree  for 
example the due date for payment and the rate of interest on late payment. 

When, however, either the contractual obligation or the statutory requirement to pay 
is breached,  businesses  which  are paid  late  will  be  able to  seek  compensation  and 
businesses  which  pay  late  will  be  required  to  pay  compensation  in  the  form  of 
payment  of interest  and  of the other costs of pursuing  debts, such  as legal  fees  and 
administrative costs. 

The  interest  on  late  payment  will  accrue  automatically,  without  the  need  for  the 
creditor to send a reminder (Article 3, paragraph  1(d)). This will bring administrative 
savings  for  businesses  in those  Member  States  (e.g. Belgium)  where  a reminder  is 
currently required. 

The uniform  retention of title clause (Article 4) will bring administrative savings  for 
businesses which use retention of title clauses, in particular  for  exports. The present 
situation  is  that  exporters  may  need  to  have  a  specific  retention  of  title  clause  for 
each Member State to which they are exporting, in order to comply with the  different 
legal  requirements  in  each  Member  State.  That  imposes  additional  burdensome 
requirements on businesses. Businesses will now be able to use a single retention  of 
title  clause by  using  one of the  formulae  or  an  equivalent  formula  in  the  proposal 
There will also be savings of legal and administrative costs by removing the need  for 
businesses  in  some  Member  States  to  go  through  formal  requirements  such  as 
registering  the contract  or using  a notary.  Initially,  businesses  may  have  to  modify 
their  standard  contract  or  individual  contracts  to  ensure  that  they  comply  with  the 
uniform  retention of title clause. However, these modifications  should  involve  little 
cost  and  should  be  one-off.  The  costs  should  be  far  outweighed  by  the  long-term 
administrative  savings,  as  well  as  by  the  stimulus  to  exports,  which  the  uniform 
retention of title clause will bring. 

The proposals  on redress procedures  (Articles  5 and  6) aim  to  ensure  that  creditors 
can pursue debts quickly,  efficiently  and  at minimum  expense. The changes  should 
bring  savings to businesses  which  use these procedures  by  reducing  the  formalities 
involved  and keeping the financial cost to a minimum,  in particular  for  cases where 
the  debtor  and  creditor  are  in  different  Member  States.  Regarding  accelerated 
recovery procedures  (Article 5), the removal of the ceiling (based on the amount  of 
the  debt)  to  which  the  procedures  apply  in  some  Member  States  will  allow  more 
debts to be  subject  to accelerated  procedures. In Germany, the accelerated  recovery 
procedure (Mahnverfahren) has no ceiling and  in  1996 over eight million cases were 
processed  through  the  system.  In  this  system,  the  average  fee  for  a  typical  debt  is 
around  ECU  17  compared  to  ECU  100  for  using  the  more  traditional  legal 
procedures for pursuing debts. 

For  the  simplified  legal  procedures  for  small  debts  (Article  6),  the  ceiling  of 
20 000 euros  will  mean  that  many  more  commercial  transactions  are  covered  by 
these  procedures,  so  that  more  businesses  can  benefit  from  the  relative  speed  and 
low cost of "Small Claims Courts". 

The  public  authorities  will  have  to  ensure  that  notices  of  public  procurement  and 
tender  specifications  contain precise  details  of payment  times  (Article  7). This  will 
involve some administrative costs, although  if standard details of payment times are 
used then the costs will be one-off. 

22 

Public  authorities  will  also  have  to  comply  with  obligations  regarding  maximum 
payment periods and automatic payment of interest on late payment (Article 8). This 
will  involve  the  modification  of  contractual  clauses  as  well  as  the  setting  up  of 
administrative  systems  and  procedures  within  public  authorities  to  ensure  that 
payment  deadlines  are  met.  There  may  be  costs  related  to  changing  computer 
systems.  The  need  to  set  up  such  procedures  was  already  highlighted  in  the 
Commission's Recommendation of 1995 (Article 6(b) and (c)). In Ireland, which has 
recently introduced a law on prompt payment by the public sector, the administrative 
costs  of  setting  up  and  running  systems  for  automatic  payment  of  interest  on  late 
payment are not thought to be significant.  It is thought that no additional  manpower 
will be required to handle the new procedures. 

4.  What economic effects is the proposal likely to have? 

This  proposal  is  expected  to  bring  very  significant  benefits  to  businesses,  in 
particular  to  SMEs.  Reducing  late  payment  will  improve  businesses'  cash-flow.  It 
will also reduce financing costs which are caused by being paid late. Businesses will 
benefit  from  reductions  in the heavy  administrative  costs of pursuing  debts,  saving 
time  and  manpower  on  for  example  sending  reminders,  managing  outstanding 
claims  and  pursuing  debts  through  various  redress  procedures.  There  will  also  be 
savings on the legal costs of pursuing debts. 

Moreover,  when businesses  are  paid  late, they  will  be  adequately  compensated  for 
all  of  the  costs  incurred.  This  will  again  have  a  positive  impact  on  businesses' 
profitability  and on competitiveness. 

Shorter  payment  times  will  strengthen  businesses'  balance  sheet  position  by 
reducing the proportion of trade receivables in their total assets. Businesses will thus 
be less likely to fail. Having cash flowing  more rapidly through the chains of buyers 
and  suppliers  will  also  make  chains  of  insolvencies  less  likely  when  one  major 
customer fails to pay on time. 

To  give  some  idea  of  the  scale  of  the  potential  benefits,  one  survey  for  the 
United Kingdom in 1994 estimated that there was GBP 10 billion (ECU  14.8 billion) 
net  late  trade  credit  owed  to private  businesses  in  the  UK,  so  that  eliminating  late 
payment  altogether  would  result  in  businesses  benefiting  by  receiving  that  net 
amount44.  Assuming  that  the  amount  of  trade  debt  in  the  UK  was  roughly 
representative  for  other  Member  States,  and  based  on  the  total  number  of 
UK businesses  as  a  proportion  of  the  total  number  of  enterprises 
the 
Community45,  the total  amount  of net  late trade debt owing to  EU businesses  could 
be in the region of ECU 90 billion. 

in 

Assuming an average bank lending rate of  12%, the interest cost to EU businesses of 
late payment could be around ECU 10.8 billion per annum. 

44  Forum of Private Business, London, 31 March  1994. 
45  The  figures  are  2.549  million  and  15.777  million  respectively:  Enterprises  in  Europe,  Fourth  Report, 

European Commission/Eurostat, 1996. 

23 

The  proposals  will  also  have  a positive  impact  on  employment.  According  to  one 
source, one out of four  insolvencies  in Europe is due to  late payment46.  There were 
an  estimated  44 567  insolvencies  or  liquidations  in  five  Member  States  (Belgium, 
Italy, the Netherlands, Finland, Sweden) in  199547, with micro-enterprises  (less than 
10  employees)  representing  the  bulk  of  these  cases.  Assuming  that  the  average 
number of employees  in these businesses was five, the number  of jobs  lost  in these 
five countries alone as a result of late payment  in one year could be in the region of 
55 000. Apart from maintaining these jobs, the proposals, by improving  businesses' 
cash-flow,  profitability  and  competitiveness,  and  by  creating  a  healthy  payment 
climate in European economies, are likely to lead to firms hiring more staff. 

The  proposals  will  also  have  a positive  impact  on  competitiveness.  Firms  will  be 
able  to  take  the  payment  period  more  accurately  into  account  when  calculating 
prices.  Those  firms  which  currently  increase  prices  to  take  into  account  long 
payment times and anticipated late payment, in particular for exports, will be able to 
reduce prices if they  are confident  of being paid more quickly.  Moreover,  reducing 
the amount of late trade debt will free resources for more productive uses such as for 
research and technological  development. 

An  overall  reduction  of  late payment  in  the  Community,  improved  procedures  for 
recovering  debts  in  another  Member  State  and  the  uniform  retention  of  title 
clause will  also  encourage  intra-Community  trade.  This  will  intensify  participation 
in  the  Single  Market  and  contribute  to  achieving  the  objective  of  economic  and 
social cohesion. 

Finally, prompter payment by the public authorities will have a positive effect  on the 
economy as a whole. Suppliers to the public authorities who are paid on time will in 
turn be  in  a position  to pay  their  suppliers  on  time,  and  this  will  have  a  beneficial 
trickle-down effect  on the economy. 

IMPACT ON SMEs 

5.  Does the proposal contain measures to take account of the specific situation of small 

and medium sized firms (reduced or different requirements etc.)? 

The  proposal  does  not  contain  specific  measures  for  SMEs,  but  applies  to  all 
businesses. The proposals will however benefit  SMEs most, as they suffer  most  from 
late payment.  The  proposal  will  be  of  particular  benefit  to  those  SMEs  which  sell 
goods  or  services  without  written  contracts  (the  majority  of  SMEs'  commercial 
transactions  are estimated  to be carried  out  without  written  contracts). The proposal 
will provide clarity  and certainty on the time  limit  for paying and the consequences 
of paying late. 

40  Fédération  Nationale  de 

l'Information  d'Entreprises  et  de 

la  Gestion  de  Créances,  Lyon, 

September  1997. 

47  Fifth  Report  of  the  European  Observatory  for  SMEs,  European  Network  for  SME  Research, 

November  1997, ch.7: "Failures and bankruptcies". 

24 

CONSULTATION 

List  the  organizations which  have  been  consulted  about  the proposal  and  outline 
their main views 

There  has  been  widespread  consultation  with  interested  parties  on  the  problem  of 
late payments over a number of years. A first round of consultation  was based  on a 
Commission  working  document  on  the  problem  of  the  time  taken  to  make 
payments in  commercial  transactions48.  More  than  130  written  comments  were 
received  from  national  and  European  professional  organizations  and  from  some 
Member  States. A public  hearing was  also  organized  on  7 and  8 July  1993,  where 
some 30 organizations expressed their views. 

A second round of consultation followed  the publication of the Commission's  report 
of  July  1997.  114  written  responses  were  received,  mainly  from  national  trade 
associations,  as  well  as  from  European  organisations,  including  those  representing 
businesses,  lawyers  and  debt  collection  agencies.  91  (80%)  were  in  favour  of 
EU legislation  on  late  payments,  and  23  (20%)  were  broadly  against.  The 
Commission  also  organized  a public  hearing  on  7 October  1997, where  more  than 
200  people  were  present.  There  was  also  strong  support  for  EU  legislation  at  the 
public  hearing,  including  from  members  of  the  European  Parliament  and  the 
Economic and Social Committee. 

The responses  showed  strong support  for  a right to interest  on late payments with a 
rate of  interest  set high  enough  to  deter  late payers. There  was  also  strong  support 
for  the right for  the creditor to be compensated  for  the  full  costs of pursuing  debts, 
such  as  administrative  and  legal  costs.  All  those  who  commented  on  the  public 
sector  were  in  favour  of  legislative  action,  for  example  setting  maximum  payment 
times and an automatic right to interest for late payments by the public  sector. There 
was  also  unanimous  support  for  an  EU-wide  retention  of  title  clause.  Many 
responses  favoured  simplifying  redress procedures. Finally, debt  collection  agencies 
at  both  European  and  national  level  have  called  for  licensing  of  debt  collection 
agencies  in  all  Member  States  and  for  a proper  Single  Market  for  the  recovery  of 
debts with mutual recognition of licences in the Community. 

48  SEC(92) 2214 final,  18.11.1992. 

25 

ISSN 0254-1475 

COM(98) 126 final 

DOCUMENTS 

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08  10  09  06 

Catalogue number  : CB-C0-98-216-EN-C 

ISBN 92-78-32941-X 

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26