You can ask our online solicitors for legal advice on late payment charges using the question box on the front of our website or the following free legal advice guide may answer your questions. 

When a payment becomes overdue you are entitled to levy late payments charges for the outstanding debts until such times as it is repaid in full. In order to protect businesses of all sizes, the government have put in place legislation to ensure fairer terms for those waiting on outstanding payments.

Late payments are one of the main reasons why businesses face financial difficulty in the UK. Businesses can be put at a significant disadvantage while waiting for outstanding payments to be settled. It can cause serious cash flow problems and even in some situations result in the business entering administration or facing serious problems with creditors.

The Late Payment of Commercial Debts (Interest) Act 1998

Established in 1998 and further amended in 2002, this Act aimed to provide businesses with the ability to charge interest on late payments and where necessary, debt recovery costs for clients who have not complied with the agreed terms and conditions in relation to payment. This Act also applies to any commercial contract that was created on or after 07 August 2002.

If a company decides to levy late payments charges the current rate is 8% above the current Bank of England Base Rate. This rate is set twice each year. The business can also seek to recover compensation for debt recovery which is a maximum of £100 on each order that is overdue.

The idea behind the late payment charges legislation is that a business can charge this amount of interest over the base rate because the charges that are levied against the debtor are much higher than they would be if the debtor settled the invoice and made the payment in full. Businesses therefore have huge bargaining power and it encourages debtors to adhere to the original terms of the contract and timescales for payment.

When a commercial contract is made, both parties can agree not to use the provisions outlined in the Act and opt to draft their own terms. However, in doing so there must be a ‘substantial’ remedy for late payments. A substantial remedy in this instance is described under Section 9 of the Late Payment of Commercial Debts (Interest) Act as:

A remedy which aims to deter late payment and adequately compensate the creditor

The remedy is fair and reasonable and it takes into consideration commercial certainty and the bargaining power of all parties involved.

Unfair Contract Terms Act 1997

Another relevant piece of legislation which can be applied to late payments is the Unfair Contract Terms Act from 1997. Any terms which are included into a contract to try and avoid the implications of the Late Payments of Commercial Debts (Interest) Act will be subject to a usual test of reasonableness which is defined through the Unfair Contract Terms legislation.

That being said, the Late Payment of Commercial Debts (Interest) Act can only be applied to certain debts. It cannot be used for damages, insurance indemnity or liquidated damages. This is because these are not deemed to be a debt as such, they are simply damages awarded due to the failure of one party to fulfill their obligations under a contract.

When an invoice remains outstanding a business has three possible options; an act of goodwill, a statutory demand for the outstanding balance or litigation.

#1 An Act of Goodwill

In some situations, particularly when a business is in financial trouble and they owe another company a considerable amount of money, but the company forms a large part of their revenue streams, an act of good will may be made. When this is made, an agreement will be reached where the creditor will not place pressure on the debtor to pay the debt immediately.

In some cases a longer payment term can be negotiated perhaps in exchange for future business or repeat orders. This is not always a viable option because there are no guarantees that the business can remain financially stable enough to fulfill the orders or deliver the services agreed.

#2 Statutory Demand

The second option is to issue what is called a statutory demand when payment for commercial debt has not been forthcoming. This option becomes available if the amount outstanding is more than £750 and the debts are not in dispute in any way. Once a statutory demand has been issued, the business will have a period of 21 days in which to pay the commercial debt.

If the debtor fails to make payment within this timeframe, the creditor can apply to the court to seek a winding up petition. This can be presented to the business and a liquidator can be appointed to liquidate the company.

When this happens however, there is no guarantee that the company will be able to pay late payments charges. When the company is wound up, in the majority of cases, secured creditors will take priority, so by the time it comes to paying unsecured creditors, there may be no money left to cover what was owed.

#3 Litigation

The most costly and lengthy route is to pursue litigation against the debtor. The Late Payment of Commercial Debts (Interest) Act will allow a creditor to make an application for legal proceedings to commence against the debtor while accruing interest on a daily basis until the debt is repaid in full.

Litigation has one distinct advantage over the other methods of debt recovery. In this instance, there won’t be any other parties who will be seeking a share of the money as there will be in insolvency. Nevertheless if the business does declare themselves insolvent during the process of litigation, the insolvency proceedings will preside over any proceedings you have started.

This can prove costly so you must be very careful about starting legal action because you may not be able to recover the debt and incur legal and court fees in the process.