New debt legislation

New UK legislation introduces a statutory right for businesses to claim interest on the late payment of commercial debts.

The Late Payment Of Commercial Debts (Interest) Act 1998 applies to all kinds of business, regardless of legal status. There is no minimum level of claim.

The legislation is being introduced in 3 phases:

  1. 1 November 1998 to 31 October 2000 - small businesses (i.e. up to 50 employees) will be able to claim from large businesses (i.e. over 50 employees) and from the public sector on all contracts agreed after 01.11.98
  2. 1 November 2000 to 31 October 2002 small businesses will be able to claim from other small businesses on contracts agreed after 01.11.2000
  3. 1 November 2002 onwards all businesses and the public sector will be able to claim from all businesses and the public sector on contracts agreed after 01.11.2002

'Late Payment' is defined as follows:

  • payment after the expiry of the contractually agreed credit or payment period
  • payment after the period recognised by custom and practice
  • in the absence of either of the above – the default period set in the legislation

The default period is 30 days from the later of:

  • the delivery of the goods or services
  • the day on which the purchaser is given notice of the amount of the debt. Such notice should ideally be a written invoice, although a telephone call would be sufficient (the problem then is one of proving that the notice was given).

The interest owing is the Bank of England base rate plus 8%. The base rate is published in the Financial Times or is available from the Bank of England on 0171 601 4878.

A supplier and purchaser can make their own contractual arrangements for a remedy for late payment. If these are satisfactory, the Act will not apply. However, to prevent abuse (e.g. by setting very low interest rates; by excessively extended credit periods), the Act requires that the contractual remedy must be 'substantial' i.e.:

  • it must be sufficient to compensate for or to deter late payment
  • it must be 'fair and reasonable' in all the circumstances

In cases of dispute, it would be up to the Courts to decide what is 'substantial'. If necessary they can strike down the contract and insist on the statutory provisions.

Claims under the Act can be made as follows:

  • When a payment is late, the supplier should inform the purchaser, preferably in writing, that they are claiming interest.
  • If the purchaser does not pay the interest, the supplier can then make a legal claim under the Act through the County Court. Forms are available from local Court offices.
  • A claim can be made up to 6 years afterwards (5 years in Scotland).

These notes are purely for general guidance and do not constitute comprehensive advice. Further Information is available from a number of sources:

  • 'A User's Guide' to the Act is available from the DTI on 0870 150 2500
  • Leaflets on the Act should be available from Court offices and CAB's.
  • Members can of course contact BECTU for advice and assistance.
21 December 1998