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Payment gridlocks: business law and practice


Payment gridlocks arise when the business does not receive the payment for the goods or services delivered to the customer on time. This slows down business development – for example, difficulties arise with introducing new products to the market, salary funds decrease, employment is limited, and there is a shortage of funds for investments. In addition to the loss of the due revenues, the business owner often incurs additional costs related to searching for alternative sources of financing and recovering receivables.

Usually, he is also forced to raise the prices of products or services, which undoubtedly affects his competitiveness, but also affects the consumers. In the most difficult cases, payment gridlocks can endanger the existence of the company. Surprisingly, market research shows that as many as 55% of micro, small and medium-sized enterprises do not use the right to charge late payment interest and to compensation of a minimum amount of EUR 40, and as many as 4% of them do not know about the EU directive on combating late payment. Only 14% of SME entities and 13% of large companies confirmed that in the debt collection process, in addition to the principal, they also seek default interest and lump-sum compensation.[1] It is surprising how only a small percentage of entrepreneurs is aware of all the options when pursuing their funds. So let’s check the legal status and business practice in this area.

 

The EU has been battling this problem for a long time

The European Union tried to fight the problem of payment gridlocks through the Directive 3000/35/EC of the European Parliament and of the Council of 29 June 2000 on combating late payment in commercial transactions. However, the market situation still required interference, therefore Directive 2011/7/EU on combating late payment in commercial transactions was adopted in 2011, which replaced the previous regulations. The problem of payment gridlocks that occurred in all Member States was planned to be solved by transitioning towards a culture of quick payments. Member States had to bring into force the laws, regulations and administrative provisions necessary to comply with this directive by 16 March 2013.

 

What improvements did the Directive 2011/7/EU introduce?

Its provisions apply to all payments that constitute remuneration in transactions between entrepreneurs, as well as to those between entrepreneurs and public authorities. It includes the right to charge interest for late payments in commercial transactions. It is set at a minimum of eight percent above the reference rate used by the European Central Bank from the day following the payment date. Compensation for recovery costs of at least € 40 has also been introduced.

However, these are not the only ways to fight the distant, often forced, payment deadlines provided for in this legal act. The payment deadline in relations between entrepreneurs should not exceed 60 calendar days, and the cases of its extension are to be analysed in terms of possible gross unfairness towards the creditor. Public authorities are required to pay for goods and services within 30 days. Only in exceptional circumstances the payment period may be extended to 60 days. National authorities are also required to take action to raise citizens’ awareness of existing remedies in the event of late payment.

The provisions also provided for a minimum scope of harmonization and allowed the Member States to introduce regulations that were more favourable to the creditor than those necessary to meet its requirements. As a result of the implementation of the above directive in the Polish legal system, on 8 March, 2013, the Act on payment deadlines in commercial transactions was adopted, which was extensively amended in 2019. Since 1 January, 2020, it is in force as the „Act on counteracting excessive delays in commercial transactions” . The changes are aimed at improving the situation of creditors in relations between professional entities. The position of the creditor, especially in the micro, small and medium-sized enterprises sector, was strengthened and allowed to cover the costs related to late payment. Some solutions were also supposed to discourage debtors from failing to meet payment deadlines.

 

What’s the outcome?

Previously, a strong market position allowed the largest corporations to impose long payment terms on their contractors. A beneficial change protecting the SME sector involves counteracting such behaviour. The act introduces a fixed 60-day payment period, without the possibility of extending the terms in commercial transactions in which the debtor obligated to provide the cash payment is a large entrepreneur, and the creditor is an SME. The situation is different when the creditor is a large entrepreneur and the debtor is SME, or both parties belong to the SME sector or are large entrepreneurs. Then the entrepreneurs have the conditional possibility of extending the payment date. This solution is designed to protect smaller players. A similar structure also applies to contractors from the public sector, who are legally obliged to a payment deadline of no more than 30 days. The exceptions are public entities that are medical entities, for which the deadline is twice as long.

The aforementioned amendment to the act changed the right to charge compensation for the cost of recovering receivables. Until 2019, a creditor who fulfilled his performance and did not receive payment on time was entitled to claim the equivalent of EUR 40. Compensation was due to the creditor in the event that the debtor did not pay the debt on time, even if he did not bear any debt collection costs. According to the current wording of the act, the creditor has the right to charge compensation in the amount of EUR 40 if the value of the cash benefit does not exceed PLN 5,000, EUR 70 if the value of the cash benefit is higher than PLN 5,000 but lower than PLN 50,000, and EUR 100 if the value of the cash benefit is equal to or higher than PLN 50,000. Compared to the previous regulation, the amendment gave entrepreneurs the opportunity to claim higher compensation, and the Polish legislator designed the regulations in a way that was more favourable to the creditor than provided for in the directive.

Another solution that brings additional funds to the entrepreneur is the right to charge statutory interest for delay in commercial transactions, if the contractor fails to settle the payment on time. The amount of interest depends on the NBP reference rate and the type of entity that is the debtor. Statutory interest for delay in commercial transactions, in the case of transactions in which the debtor is a public health entity, is calculated in the amount equal to the sum of the NBP reference rate and eight percentage points. In the case of transactions in which the debtor is not a public entity which is a medical entity, the interest is calculated in the amount equal to the sum of the NBP reference rate and ten percentage points.

The amendment to the act introduces a new type of procedure, granting powers to the president of the Office of Competition and Consumer Protection. Today, it has the ability to control and impose administrative penalties on entrepreneurs who are excessively late in paying their cash benefits to their contractors. If a creditor suspects that he has become a victim of payment gridlocks by an unreliable contractor, he may notify the Office of Competition and Consumer Protection. The proceedings will be initiated ex officio when the sum of the cash benefits paid after the deadline or not fulfilled by the entrepreneur within 3 consecutive calendar months amounts to at least PLN 5 million. From 2022, this amount will be PLN 2 million. As a result of the proceedings, the President of OCCP may impose an administrative fine on the entrepreneur who is causing the payment gridlock. If the entrepreneur hinders the inspection, the President of OCCP is also entitled to impose a fine for obstructing it, failing to provide the requested information or providing false information. The introduced regulations have a preventive and repressive role against entrepreneurs who fail to meet the payment deadlines.

The largest enterprises, i.e. tax capital groups and entities with revenues exceeding EUR 50 million per year, are required to prepare reports on the payment practices used. Reports should be submitted to the competent minister of economy, currently the Minister of Entrepreneurship and Technology, annually by 31 January for the previous year. Anyone can view the reports as they are available in the Public Information Bulletin. The provision of data is to allow contractors to check how a specific entity complies with the amended provisions on payment deadlines.

 

How did the pandemic affect payment gridlocks?

There is no doubt that the whole world woke up in a different reality in 2020. Companies not only struggled with staff shortages due to illness or quarantine, but also with restrictions imposed by the state, which decided to temporarily close companies or limit their activities. Consumers, fearing for their jobs, significantly reduced their expenses, and many entrepreneurs had to implement new technological tools for remote work or e-commerce. At the same time, operating costs were reduced in order to stay on the market. This situation also contributed to the emergence of payment gridlocks. It is difficult to find an industry that has not felt the negative effects of the crisis.

Smaller companies are particularly hard hit by the effects of payment gridlocks due to their weaker market position compared to large corporations. As you can read in the KRD (National Debt Register) report – Financial Liquidity of SMEs, half of the surveyed entrepreneurs from the SME sector (57.2%) declare that they extend the payment deadline at the request of their contractors, more often than before the pandemic. This phenomenon can be observed most often in small (61.8%) and medium-sized (69.3%) companies, less often in micro-entrepreneurs (41.3%).[2]

However, everything has a bright side, and as many as 6 out of 10 entrepreneurs believe that the crisis has motivated them to better manage the risk of late payments in their companies – as we read in the 2021 European Payment Report – Intrum. Entrepreneurs take steps such as requiring prepayment (41%), customer credit checks (31%) and debt collection (29%).[3] In the face of the crisis, they also consciously approach negotiating the terms of each transaction for fear of unreliable contractors, which should become a standard procedure in the future.

In turn, according to the research conducted by Keralla Research for BIG InfoMonitor on companies complaining about payment delays by more than 60 days, the situation in relation to the fourth quarter of 2020 compared to the first quarter of 2021 has improved. The biggest difference was recorded in the construction, commercial and service industries. The situation in transport changed for the better, while the industry remained at the same level. The industry that best deals with late payments is construction. The industry is just behind the leader with the result of 41%. The situation is similar in transport (33%) and services (31%). Trade continues to lead the ranking in terms of unreliable customers. Every other contractor in this industry has delays in invoice payments at least two months after the due date.[4]

Both the European and Polish payment gap narrowed over the last year. Research conducted as part of the 2021 European Payment Report shows that the payment gap in the B2B sector has shrunk from 14 to 11 days in Europe, and from 17 to 10 days in Poland. Does this mean that some entrepreneurs have started to base their business on good market practices? Despite the improvement, it is doubtful. It is not without significance that in 2020 Polish entrepreneurs received over PLN 172 billion as part of the Anti-Crisis Shield. The funds were allocated in the amounts of 33% to trade, 24% to industry and 15% to construction.[5] Using the funds granted by the state, entrepreneurs could catch up on arrears in payments and stay on top of payments. The fear of the deepening of the crisis forced companies to dispose of funds rationally. Will this approach stay with us for longer? According to research conducted in 2021, as many as 92% of Poles agree with the view that paying back debts is always a moral obligation.[6] However, how does this position appear in practice when looking at the statistics cited above?

 

[1] 2021 European Payment Report – Intrum.

[2] Financial Liquidity during the Pandemic, February 2021, Research Report, NDR

[3] 2021 European Payment Report – Intrum.

[4] Keralla Research report for BIG InfoMonitor, 16 March 2021.

[5] https://www.gov.pl/web/rozwoj-technologia/najwazniejsze-dzialania-i-rozwiazania-mrpit–podsumowanie-2020-roku , 26.08.21.

[6] Prof. Anna Lewicka-Strzałecka, Moralność Finansowa Polaków [The Financial Morality of Poles] 2021, ZPF (Association of Financial Companies).


Author of the article:

Michał Kwieciński

Attorney, co-founder and managing partner of RK Legal, specialist in commercial law and civil litigation. At the firm, he supervises the Claims Management Division specialising in servicing B2C debt assets and B2B corporate receivables, also in foreign markets.

 

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