…with topical addendum: Protect your business and employees from the impact of COVID-19. Don’t let your business be another victim.
“Late payment is crippling small businesses, while the U.K. economy is crying out for investment. By failing to tackle late payment, we are starving our small businesses of the capacity to act” – Labour peer Lord Jonathan Mendelson
Last year we had the first reading of The Small Business Commissioner and Late Payments etc Bill 2019-20 in the House of Lords by Lord Mendelsohn. The new Bill seeks to address the problems of late payments experienced by small and medium-sized enterprises (SMEs). While there are many reasons businesses experience cash flow problems, the most common cause is the late payment of invoices by clients.
The Federation of Small Businesses estimates that £26.8 billion is not paid on time to small businesses, with the average amount owing being £31,901.00. These figures translate to approximately 30% of small businesses receiving late payments from their clients, with an average delay of a month from the terms and conditions in place.
The repercussions of too many late payments frequently lead to otherwise successful businesses struggling to pay their own creditors on time, causing problems up and down the supply chain, often resulting in the closure of businesses as well as adding to general economic suffering. Almost 25% of personal and commercial insolvency is caused by issues related to late payments.
So, what is proposed and what are the major changes to our existing legislation under the Bill?
The Bill is written to make provision to amend:
- the statutory limits for payment of invoices;
- a statutory time limit for resolving payment disputes;
- interest for late payments and penalties for persistent late payments or noncompliance;
- prohibit specified payment practices;
- repayments under public sector construction projects to be held in project bank accounts; and
- amend the remit, role and powers of the Small Business Commissioner (“SBC”)in regard to late payments.
Amendments to The Late Payment of Commercial Debts (Interest) Act 1998, will see:
- a reduction to the maximum statutory credit terms from 60 days to 30 days;
- a 30-day limit on resolution of payment disputes, extendable only by mutual agreement. If a resolution is not agreed within the 30-day resolution period, either party may complain to the SBC;
- a duty on large company purchasers to pay statutory interest and compensation automatically at the point of paying a late invoice regardless of whether or not the supplier has asked for the compensation and interest; and
- an increase in interest rate to 50% in cases where non-payment has exceeded 60 days or when required interest was not paid at the time of invoice payment.
Amendments to the Enterprise Act 2016, will see:
- an expansion to the remit of the SBC to include public contracting authorities and construction businesses;
- a duty placed on the Secretary of State to ensure by regulations that construction operations should be included within the remit of the SBC;
- a power for the SBC to impose penalty notices on larger businesses or public contracting authorities for persistent late payment, non-compliance, misreporting of payment performance data, or failure to provide information or documents requested by the SBC as part of their investigations;
- a maximum financial penalty for large businesses of £10,000,000 or 4% of annual worldwide turnover, whichever is higher (matching the fines introduced in the Data Protection Act 2018). The maximum penalty for public contracting authorities is £1,000,000;
- a responsibility for the SBC to collect and publish payment performance data by both large businesses and public contracting authorities at the end of each financial year; and
- the banning of unfair payment practices which negatively impact SMEs namely ‘Prompt payment discounts’, ‘Onboarding’ and Pay-to-stay’ practices.
Amendments to other enactments, will see:
- auditors under a duty to report on payment performance and report on the accuracy of late payment data reported by their client. It further makes auditors liable for any misreporting or non-compliance with the duty to report by their clients;
- a widening of the data that public contracting authorities must publish under the terms of the Public Contracts Regulations 2015, to include their annual compensation liability and the total number of invoices not paid on time; and
- a requirement that public contracting authorities are to establish Project Bank Accounts (PBAs) where they are involved in construction operations in excess of £500,000. PBAs would ensure that all monies would be held in a separate account so that all contractors in the supply chain have their payments protected in the event of a Tier 1 insolvency.
It is certainly true that late payments cause cash-flow problems and act as a brake on the efficient working of the economy. The Government must go above and beyond to prioritise the development of a solution to the UK’s late-payment culture. A date for the second reding has not been given, but we will report in greater detail if the Bill passes later this year.
Addendum: protect your business and employees from the impact of COVID-19. Don’t let your business be another victim!
You are not alone. Griffin Law is already advising businesses of all sizes on the commercial impact of COVID-19, providing prompt practical advice. While we cannot be sure for how long the repercussions will be felt, the economy’s wheels must continue to turn.
Griffin Law specialises in assisting businesses to nagivate choppy waters and overcome the seemingly insurmountable. Whether it is late payments or pandemics, there are steps to take which can smooth the waters and ensure your business is suitably proofed to weather the storm.
To help you during this difficult time, Griffin Law has prepared a few of the key commercial issues facing businesses, alongside some practical advice on the steps you can take:
Recovering debts owed to your business:
Cashflow is crucial during this time. If you have customers who have not paid invoices, we recommend that you talk with them immediately and try to agree a repayment plan which eases the financial burden and is sustainable. Dialogue can often minimise the disruption of debts and resolve disputes before they have begun saving both cash and customers.
If your customer is avoiding you, it may mean that they are unwilling to discuss repayment. Should this be the case, do not delay, the longer their insolvency lasts the more challenging recovering your invoice may become.
Review your contracts and know your rights:
A full understanding of the contractual rights and obligations at stake will allow your business to take a considered approach to the issues at hand. Understanding the terms which bind both parties will facilitate the early resolution of a breach. Businesses should review contractual arrangements to ensure that they understand the extent of their, and their key counterparties’, obligations, and liabilities.
Certain contracts will feature provisions which could excuse one party from contractual performance but understanding their scope can provide certainty. Alternatively, a party may seek to relay on the common law doctrine of frustration. This would act to terminate their obligations under the contract. If this is the case, a record of all relevant factual and economic evidence of the virus should be considered.
Can you rely on your insurance policies?
What does your insurance policy say about business interruption? You may also have cover for loss of use of your commercial premises due to contamination. Do not be caught out by notice periods or other formal requirements as you may be obligated to notify your insurer of the situation by a certain time if you are to rely on the policy.
Griffin Law’s knowledge of alternative dispute resolution mechanisms and strategies means we are well prepared to assist businesses with the challenges arising out of COVID-19. Whether you require settlement agreements, options for recovery, advice on contract terms, obligations, liabilities or strategy, our approach to the world of dispute resolution is capable of responding to the new challenges in a manner which assists strong commercial positions while catering for the new reality.
Griffin Law has taken all reasonable precautions to ensure that information contained in our White Papers is accurate. We stress that the content is not intended to be legally comprehensive and that no action be taken on matters covered in this document without taking full, legal advice. While the facts and basis of claims are always unique and varied, this note attempts to give a starting point and overview of how to recover personal or business debts.
Griffin Law is a niche firm of innovative, proactive, tenacious and commercially-minded lawyers who guarantee to share the risk of litigation with every client. This includes (but is not limited to) discussing litigation funding options that may be available to clients.
To discuss debt recovery techniques and other financial litigation matters contact James Day at firstname.lastname@example.org or call 01732 52 59 23.