A Case Study Example

Twenty years ago, Scandinavian payment patterns were very similar to those that now exist in the UK, Belgium, Italy and the Netherlands. Late payment was widespread and a serious problem and there was little or no specific legislation for suppliers to call upon.

In the mid 70s, the Swedish Government first started to combat this problem with new legislation. The Debt Recovery Act 1974, took steps to deal with a major cause of late payment, lack of clarity as to what the payment terms actually are. The Act stated that all demands against a debtor should be put in writing and should contain clear information about the name of the creditor, the nature of the debt, the capital sum, the interest and compensation charges (indicating the rate of interest and the point at which it started running) and clear instructions as to a suitable mode of payment.

Soon afterwards, the most important step was taken, the introduction of statutory interest. The Swedish Interest Act 1975 ruled that in the absence of contractual interest, debtors are obliged to pay interest on overdue debts from due date. The rate of interest was set at the official discount rate plus a percentage, currently 8%. Thus if the discount rate were, for example 5%, statutory interest on overdues would be 13%.

The aim of this formula was to ensure that it became more expensive to borrow from suppliers than from the bank. This is the keystone of discouraging late payment. If it is financially advantageous to pay late, most people will do so. If it is financially advantageous to pay on time, the level of late payment drops.

Statutory interest was introduced in Norway through the Norwegian Interest (Late Payment) Act 1976 and in Denmark through the Danish Interest (Late Payment) Decree 1986. The Danish calculate the interest rate by adding 5% to the discount rate, while in Norway the rate is set and periodically adjusted by the government and is at present 12%.

Compensation for administrative collection costs was introduced in Sweden in 1981 by the Debt Recovery (Reimbursement of Costs) Act. This allows the creditor to claim back from the debtor the costs incurred in chasing overdue payments. A separate charge is applied to each stage of the collection process. So, for example, if a written reminder has to be sent to the debtor, the creditor can charge around £5; for a demand letter roughly £15; for the setting up of an installment plan some £13 and so on.

In Norway and Denmark, the level of cost compensation is related to the value of the claim and ranges from DKK 250 to DKK 2.400 in Denmark and from NOK 200 to NOK 10.000 in Norway.

While Scandinavian countries have efficient and effective debt collection legislation, research released last year by Dun and Bradstreet has revealed that some European countries are not successfully making use of debt collection tools, such as statutory interest, to chase debtors.

Belgian companies were recorded to have the worst average payment performance, with debts being paid 18.4 days late. Dutch companies were also identified as suffering from acute late payment with commercial debts being paid on average 17.7 days beyond the agreed due date.

The research, which was drawn from a survey of 1.3 million companies across six European countries, has clearly illustrated the need for a European ruling to help reduce the incidence of late payment.

European Late Payment Legislation - EC Directive
The European Commission and Parliament is aware of the impact that late payment is having upon business throughout Europe. In June 2000, following extensive research and consultation, the European Commission introduced a new ruling to address the issue of late payment.

From 8 August 2002 all European countries are required to have the EC Directive’s late payment law in place. Some countries, such as Germany, have already complied with the legislation, while others are implementing final requirements now.

Domestically, the new legislation will complement the UK’s existing Late Payment of Commercial Debts (Interest) Act, which was introduced on 1st November 1998.

The EC Directive will bring forward the final phase of the existing three-stage Late Payment of Commercial Debts (Interest) Act thereby giving all businesses, regardless of size, the right to claim interest on late payment. It also has additional benefits including:

1. A statutory right to interest (SRI) at a rate of at least 7% over the European Central Bank base rate for euro area countries. European countries outside the euro area will use their own national bank rate. The UK will continue to add 8% to the Bank of England’s base rate;

2. The right to reasonable compensation for debt recovery costs incurred as a result of late payment;

3. Grossly unfair terms and conditions can be challenged where these undermine the terms of the legislation.
   It is hoped that the EC Directive will create a ‘level playing field’ for European trade and, in more parochial terms, provide UK exporters with greater certainty in their trading activities with other EU countries.

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