Late Payment Directive
By George Farrugia

Late Payment Directive guarantees interest on trading debts

Legal Notice 233 of 2005 will come into force in Malta as from July 1st 2005. The belated implementation of this EU directive in Malta had been a source of many complaints by local traders and their representatives, mainly the Association of Credit Management and also the EU.

The European Union had agreed on this directive in June, 2000 and each member state had to transpose it into the national laws by August 8th, 2002. In Malta it was generally expected that this directive would become part of our national laws as from 1st May, 2004 as soon as the island became a full member of the EU. For still unknown reasons this was not to be.

Basically this directive will now guarantee interest on trading debts that are not settled within the agreed time frame. Previously, if a trader wanted to be compensated for late receipt of amounts due to him, he had to resort to court action, unless such interest was included in the trade contract.

As from 1st July, 2005 interest will become automatically payable from the day following the date or the end of the period of payment fixed in the contract. When no such date or period is fixed, interest will start being charged automatically without the need for a reminder 30 days following the receipt by the debtor of the invoice. When the date of receipt of the invoice is itself uncertain, then interest will accrue 30 days after the date of the receipt of the goods or services.

Legal Notice 233 establishes the rate of interest as the Central Bank Intervention rate (currently 3.25 per cent) plus another seven per cent per annum. This legal notice also makes the retention of title by the trader on goods subject to a commercial transaction much easier when such retention of titled has been expressly provided for in the agreement before actual delivery had taken place.

The purpose of this directive is to combat the trend prevalent all across Europe, but especially in Malta, where traders finance their operations, especially capital expenditure, through the withholding of payments due on trade debts. Across Europe, such delayed payments (estimated at around Euro90 billion each year) are estimated to account for one out of every four insolvencies and cost around 450,000 jobs each year. SME are considered to be the most at risk since their financial strength is limited and their credit control policies are normally non existent or few. SME are also highly at risk when making supplies to larger clients since the latter will normally try to use its market position to dictate unrealistic payment conditions.

Unfortunately Malta has yet to implement two important Articles within this directive, namely:

• Article 5 which provides for the issue of an enforceable title on such debt when there is no contestation within 90 days of the creditor’s application to the courts . This would have been especially helpful given the state of our law courts, where delays in getting a sentence is already considered as unacceptable and unjust.

• Article 3(2) which permits the local authorities to define themselves the credit period on certain transactions – normally a maximum of 60 days – thus leading either to the prohibition from exceeding this period, or at least fixing a mandatory interest rate. This would have been useful in transactions with certain industries – example hotels, where credit periods can sometimes extend to over one year and where the trader has little effective control in view of the commercial muscle of the client.

The above provisions apply to every trading transaction, irrespective of size or industry and also covers transactions with and/or by the Malta government, local authorities and local councils.

The provisions of this legal notice do not apply, however, to debts that are subject on insolvency proceedings or to contracts concluded prior to1st May, 2004.

Disclaimer

The above information is being provided as a general guide only and should not be considered as a substitute for professional advice.

George Farrugia is a partner and director at MGI Malta. He can be reached at