Companies lose customers over the years, through owner retirement, takeover etc. What can be done about getting some of the amounts due from these under the 1998 Act and the European Directive?

Let us look at the position: from 1 November 2000 (a bit beyond the Statute of Limitations, which is 6 years in England and Wales, and 5 years in Scotland), small businesses (less than 50 employees) could claim Statutory Interest (SI) at 8% above base from other small businesses, large companies and the Government.

From 7 August 2002, the European Directive added ‘compensation charges', which were transcribed in the UK as £40 for raising an interest invoice for a bill of up £999, £70 for up to £9,999 and £100 for £10,000 plus. Everybody can claim from everybody.

For example, if one customer paid his £999 August 2002 invoice (due at the end of September, i.e. net monthly) in October, towards the end of the month, and did the same each month, the amount owed would be about £580 in interest and £2320 in compensation charges. Late payment has often been funded by overdraft costs – yours.

If the client has just been lost, that is £2,900 for one customer, on one invoice, a month. Should the amount be just over £1,000, the interest charge would be about the same, but the compensation charge would be £4,060, another £1,740. It would be more if there were more invoices, and certainly more if payment was even later, and it is nowhere in the accounts.

To find out how much, go to the www.payontime.co.uk website (sponsored by the DTI) and run some invoices through the calculator, and use the printouts to support your interest and charges invoices. If no payment terms have been agreed, the default term is net 30 days, not net monthly.

The IPA, the regulatory body for insolvency practitioners, now has the claiming of SI as part of its procedures for companies in administration, so quite a few companies will get some unpleasant surprises in the future. In addition, the EC website says: "in the absence of contractual provision, automatic payment of interest (no reminder needed) starts at 31st day after receipt of goods or services".

Some people may doubt the impact, so they should refer to the case of FPB member Ruttle Plant Hire Ltd v Defra section 17.

Calculating SI has great value as a management tool when examining the costs of running your existing clients, enabling you to negotiate from a position of strength when facing a client intent on lowering purchase prices. The amount of time taken to recover SI costs by changing a supplier could well be over five years.

In these negotiations, it could be pointed out that a contract needs to have a substantial remedy for late payment e.g. if 90 days is wanted, there could be a 90 day price with the latter at 8% above base for 60 days added to the 30 day price, or some similar term.

It is worth a look at, and to send invoices out to ceased customers – you have no clients to lose (we can talk about how to deal with those later). If you do well, tell the FPB, and if extremely well, a case of bubbly to me so that I can drink to your success!

About the author
Paul Gregory is an adviser to the FPB on late payment, competition and aspects of regulation. He has practical business experience, having started three companies, and is the author of Just how far can the late payment laws help in the insolvency process? and a main contributor to the FPB's response to EC on late payment.