06 July 2005

The Web

A short document with serious implications

Late payment in commercial transactions is considered as one of the main concerns of the Maltese business community. Some companies, across all sectors of the Maltese economy, are facing liquidity problems, which are evidently seen and remarked in their audited accounts. We also see a great deal of bartering going on with building developers exchanging property as payment to sub-contractors. Some other companies complain that as a result of late payment, they are unable to restructure appropriately in order to face the new challenges and opportunities of today’s market demands. However, similar difficulties are also found across the European Union.
A published leaflet of the Directorate-General for Enterprise of the European Commission on late payment revealed that in Europe, one out of four insolvencies is due to late payment, leading to a loss of 450,000 jobs each year! The payment delays in commercial transactions across the EU are quantified at EUR 90 billion a year (around Lm40 billion per year) and they account for EUR 10.8 billion in terms of lost interest. In addition, outstanding debts worth EUR 23.6 billion are lost every year through insolvencies caused by late payment.
In 2004, Intrum Justitia, Europe’s leading provider of credit management services, carried out a survey in 22 European countries involving more than 9,000 companies. This survey, shows that the majority of the participant companies are strongly concerned about the consequences of late payments. The same report states that payment uncertainty was cited as the most significant obstacle to trade. The classic obstacle of ‘customs duties and taxes’ and ‘administrative obstacles’ were considerably less significant in trade within Europe.
A quick analysis of the local credit scenario gives very similar results. Court cases filed in our Law Courts, indicate the magnitude of this problem in the local market.
During the year 2004, more than 4100 Court Cases were filed at the Civil Law Courts of Malta, comprising of The Small Claims Tribunal, The Courts of Magistrates (Civil), and The Civil Court, First Hall. Nearly 3000 of these cases were related to non-payments, representing an alleged amount of more than Lm10.5 million. And this is only the tip of the iceberg, because businesses go to the courts only as a last resort. Cases take long to be decided, court costs are often higher than the outstanding amounts, and even when a claim is upheld, enforcement of court judgments leaves much to be desired.
By the Legal Notice 233 of 2005, the EU Directive 2000/35/EC has been transposed into the Maltese Law and shall apply to all contracts signed after the 1 May 2004.
This Directive applies to all commercial transactions including all the transactions carried out between undertakings or between undertakings and the public authorities. The Government, the Local Councils and other public bodies are therefore included whenever a public procurement contract is signed with the private sector.
Although this Directive does not harmonise the payment period across the Member States, it defines a fixed reference period of 30 days commencing from the date of receipt of the invoice or from the date of receipt of the goods.
It also imposes a penalty interest, which starts automatically in the event of payment delay at an interest rate of 7% above the set Central Bank rate. The current local Central Bank reference rate, as it is referred to in the Law, is set at 3.25%, therefore 10.25% in total can be charged in case of late business payment.
This penalty interest rate should help to discourage enterprises from paying each other late, since it would be more expensive to delay payment than use one’s own banking facilities.
The same Directive allows the seller to retain title of goods until payment is completed, however this should be explicitly agreed between parties before delivery.
Moreover, the Law addresses the compensation for all the costs associated with the recovery of the debt. Article 26C (5) states that “unless the debtor is not responsible for the delay, the creditor shall be entitled to claim reasonable compensation from the debtor for all relevant recovery costs incurred through the latter’s late payment.”
Surprisingly, I make reference to Article 5 of the EU Directive 2000/35/EC, where it is stated that Member States must ensure that an enforceable title (court order or judgement) for unchallenged claims would be obtained within ninety days from when the legal proceedings are instituted in court, irrespective of the amount. Although this Article should help speeding up the payment recovery, it was completely left out when the Directive was transposed into the Maltese Law. In Malta, we do have a fast track to get a court order but restricted to amounts not exceeding Lm5,000.
By the implementation of this Directive, the interests of the Maltese trade creditors will be protected against any fraudulent debtors. However, the trade suppliers should be aware of the benefits that this Directive provides, and in my opinion, they should apply its provisions when selling to their customers on credit to their own benefit.
Local suppliers selling in the EU market also benefit from this Directive since all the Members States had to implement it, thus no different legislation exists in the EU market.
Notwithstanding, the honest debtors should not be effected by this Directive, and should neither affect the business relationship between the trade creditors and their debtors provided that the debtors honour their commitments on time and as agreed in the contract between the parties concerned.
MACM will be organising a number of workshops to its Members in the near future, address various issues pertaining to the local credit environment. This Directive would be one of the topics for discussion on top of the MACM agenda.

The author is the administrator of the Malta Association of
Credit Management

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