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Planned new EU Late Payment Regulation under fierce fire

In September 2023, the EU Commission presented the draft for a new Late Payment Regulation, which is currently under discussion. According to the paper, the main motive is to remedy alleged deficiencies in the current version of the Late Payment Directive.

According to the draft, the proposed regulation is intended to strengthen reliable cash flows in order to bolster the competitiveness of the EU economy and, in particular, of small and medium-sized enterprises (SME). The latter are especially to be protected against asymmetries in bargaining power, which is where the main cause of delays in payments is to be seen, according to the reasoning of the regulation.

The envisaged set of rules is said to create an improvement in terms of fairness in business transactions, is supposed to strengthen the resilience of SMEs and supply chains in general and, last but not least, is also to serve to promote the digitisation and credit management of companies.

The new proposal is based, among other things, on the results of an evaluation of the existing Late Payment Directive in 2015, which showed that while its regulations were predominantly welcomed, affected creditors were, at the same time, often prevented from actually claiming the rights granted to them for fear of the economic superiority of their business partners.

Replacing the existing directive with a directly applicable regulation without the need for implementation by national legislators would quickly create a standardised and binding set of rules throughout the EU.

Main content of the regulations of the new EU Late Payment Regulation

The envisaged new rules are to apply exclusively to business transactions between companies (Art. 1). The following planned regulations are particularly worthy of mention:

  1. Mandatory legal limitation of payment terms to 30 days for B2B transactions (Art. 3, 9)
  2. Analogous to 1.: Inspection or acceptance procedures that constitute a prerequisite for a payment obligation are to be allowed to last for a maximum of 30 days – without exception (Art. 3, 9)
  3. Binding obligation to claim statutory interest on arrears (Art. 5, 9)
  4. Creditors are entitled to lump-sum compensation of at least €50.00 per business transaction for their recovery costs (Art. 8, 9), which they may not waive.
  5. Member States designate bodies who are responsible for enforcing the law, who carry out investigations ex officio or as a result of complaints, and who are authorised to impose administrative actions and to publish the names of offenders (Art. 13, 14, 15)
  6. In the case of public construction contracts, the contracting authorities must check whether the payments to the main contractor have been forwarded to the direct subcontractors (Art. 4)
  7. Member States are obliged to set up a national mediation system for the (voluntary) settlement of payment disputes in business transactions (Art. 16)
  8. Member States promote the availability of digitalisation of credit management and training in the areas of credit management and financial literacy (Art. 17)

Evaluation from the perspective of creditors & current status of the intensive discussion

At first glance, the legal position of creditors is strengthened by the draft, which, against the background of the numerous EU regulations in restructuring and insolvency law that show maximum friendliness to debtors, is what you might call overdue. However, the price paid for this is an intervention into the freedom of contract that is partly obscure in its reach, and whose side effects in terms of the possibilities of corporate financing via the use of trade credits are obviously completely underestimated by the initiators of the draft.

The focus here is particularly on the new regulation provided for in Art. 3, which permits a mandatory maximum period of 30 days for agreed payment terms as well as for inspection and acceptance periods (Art. 9). With the intention of protecting SMEs in the creditor role against unfair practices by overpowering partners in negotiations, the proposal overlooks the fact that it is precisely these who not only routinely benefit from the granting of longer payment terms by their suppliers, but are regularly absolutely dependent on this unbureaucratically obtainable financing for their economic survival.

Due to the dramatic importance of the functioning of trade credit as a source of financing, an alliance of the most important German business associations, BDI, BGA, DIHK, MITTELSTANDSVERBUND, HDE, GDV, Deutsches Aktieninstitut, Markenverband and Börsenverein des Deutschen Buchhandels e.V, has even addressed the decision-makers on this issue with a joint statement.

In addition to these existential consequences of such a rigid regulation, which were overlooked by the draft’s authors, one might also ask whether, in view of the excessive bureaucracy, which is rightly the subject of complaints, the further authority provided for in Art. 13ff is really needed in order to monitor compliance with the set of rules.

In our view, however, the obligation to collect statutory interest on arrears provided for in  Art. 5 para. 3 in conjunction with 9 and the improvement of the regulations on the reimbursement of recovery costs in Art. 8 are to be welcomed. The same applies for the regulations to strengthen digitalisation and promote training in credit management per Art. 17.

A decision from the Commission on the disputed issues is still pending. In view of the drastic consequences for SMEs that are to be feared, the importance of a regulation on these issues that applies directly across Europe could hardly be greater. The topic was on the agenda of the Internal Market Committee for a vote on 22 February 2024. The amendments discussed there often provide for at least an extension to 60 days on the central issue of the maximum permissible payment term, and in some cases a differentiation according to company size or a restriction to public authorities as debtors is also proposed. As there is a need for further clarification, the vote was postponed to 21 March 2024.

Update March 2024

Following significant criticism from associations and member states of the planned EU Late Payment Regulation, the EU Committee on Internal Market and Consumer Protection agreed on a more moderate common position at its meeting on 20 March 2024. The corresponding proposal was adopted with 33 votes in favour, 10 against and 2 abstentions. Fortunately, the clear criticism from the member states has had an effect. Particularly noteworthy in the draft report on the planned EU late payment regulation is the stipulation of the general permissibility of up to 60 days payment terms in the B2B sector, subject to prior agreement, and even up to 120 days for seasonal items and products with low turnover, whereby specific product categories are to be stipulated.

Update April 2024

On 23 April 2024, the topic was now on the agenda of the EU Parliament in Strasbourg. A vote was held on a slightly modified draft, which was adopted by a majority at first reading.

Full resolution European Parliament legislative resolution of 23 April 2024 on the proposal for a regulation of the European Parliament and of the Council on combating late payment in commercial transactions (COM(2023)0533 – C9-0338/2023 – 2023/0323(COD))

The most important changes in the adopted version are as follows:

Article 3(4a) (new): In order to improve the payment practice of public bodies towards businesses (G2B), it is now provided that, upon application to the public body that owes the amount due, it is possible to offset the amount due against outstanding amounts owed by the creditor to the same public body.

Article 5(3): The prohibition on waiving interest on arrears should now only apply if the debtor is not a public body or a large enterprise.

Article 8(1): According to the revised version, the debtor should be obliged to pay compensation for recovery costs, which is staggered as follows:

  • EUR 50 for each individual transaction with a value of up to EUR 1,500,
  • EUR 100 for each individual transaction with a value of between EUR 1,500 and EUR 15,000
  • EUR 150 for each individual transaction above EUR 15,000

Article 8(3): If the debtor is a public body or a large company, the creditor should not be able to waive his right to the lump sum compensation.

Article 9: Restrictions on the ‘assignment of credit’ to obtain financing from banks or factoring companies and on ‘recourse to a court order for payment’ should now be ineffective throughout the EU.

Article 12: For uncontested pecuniary claims, the current text aims to ensure that creditors receive an enforceable title within 60 calendar days of filing the action or application with a court or other competent authority.

Article 14(1): According to the amended version, the enforcement authorities to be set up on a mandatory basis are to be given the power to determine infringements of the Regulation and to oblige the debtor to pay default interest and/or compensation to the creditor.

Article 19: For self-employed persons and micro-enterprises as debtors, the regulation should only apply 24 months after entry into force, for all others 18 months after entry into force in accordance with Article 20

Assessment of the current status

Despite the improvements that have been made, the adopted text still shows little practical expertise on the part of the EU parliamentarians. Although the authors, with their comments on the prohibition of assignment in connection with financing issues, have probably finally recognised that their plan will have a significant impact on corporate financing, the text of the regulation still ignores the serious consequences for one of the most important financing instruments for the very companies that the regulation is intended to help: supplier credit.

Furthermore, the justified criticism from the business community of completely excessive bureaucracy still does not seem to have been taken on board if, for no apparent reason, the obligation to set up a new enforcement authority for the Member States is created, even though the tasks intended for this authority, in particular with regard to default interest and recovery costs, are already carried out by the courts and are in good hands there.

However, as the final adoption of the regulation can only take place after the European elections in June 2024 by the newly constituted Parliament, there is still hope for further negotiations, improvements or even a complete cancellation.

We will keep you informed.