In February 2011, the European Parliament and the Council of European Union (EU) has adopted the Directive 2011/7/EU, “Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on late payment in commercial transactions” with the aim of protecting businesses within the EU, especially small and medium enterprises (SMEs), against delayed payments associated with commercial transactions and thereby improving their competitiveness as well as enhancing the functioning of the internal market.
This Directive shall apply to all payments made as remuneration for commercial transactions. All member states were required to integrate it into their national law. Cyprus was one of the first EU members to adopt the legislation and implement its provisions to protect against late payments in commercial transactions.
To this end, the Law No. 123(I)/2012 on Combating Late Payments in Commercial Transactions of 2012 was passed by the Parliament of the Republic of Cyprus. The Law applies business-to-business transactions, as well as transactions between businesses and public authorities. The Law establishes specific time limits within which businesses are required to make the payment for any goods or services received from another party. It also specifies the minimum damages to be paid in the event that the payment is delayed, while also detailing how to determine the interest rate on late payments.
Late Payment Directive in the Light of the Covid-19 Pandemic
Not just the European economy, but global economy, has been ravaged by the threat of the Covid-19 pandemic that has lasted through most of 2020. Stringent lockdown measures, including second rounds of lockdowns in several European nations, has put severe pressure on the EU economy. With economic activities having slowed down for months, European governments have put various relief measures in place. With the aim of increasing liquidity and cash flow for businesses, the governments have approved tax relief initiatives, loans and government grants.
Due to the business shutdowns during the pandemic, numerous payments for commercial transactions have been delayed beyond the deadlines set up via contracts, despite goods or services having been delivered.
Back in 2017, the then EU Commissioner for Internal Market, Industry, Entrepreneurship and SMEs, Elżbieta Bieńkowska, had stated, “Late payments are a major burden for Europe’s companies, especially small ones. Being able to rely on timely remuneration from their contractors allows businesses to do their job and deliver for their customers and employees. By asking Member States to respect the rules on late payments, we are protecting businesses and helping EU’s competitiveness.”
The negative impact of late payments can be much more significant in the aftermath of the Covid-19 pandemic, with businesses already struggling to remain profitable and competitive. This is especially true for healthcare systems, which are at the frontline in helping contain the spread of the virus and offering crucial screening and treatment services. Therefore, it is even more imperative for businesses under the current circumstances to familiarise themselves with the provisions of the Late Payment Directive.
Deadlines Set by the Late Payments Law
All businesses, public or private, are required to settle invoices within 30 days of either having received the goods or services or the invoice. The payment period starts from the date on which the invoice is received. In the event that this date is uncertain, the payment period starts on the day on which the goods or services were received. In case the invoice is received on a date prior to the delivery of the goods or services, the payment period will begin on whichever date comes later.
In the event that the recipient company has any procedures for the verification or acceptance of the delivery of goods or services, the payment period will begin on the date that all these procedures take place, even if the invoice was received on an earlier date.
The Law does provide for an extension of the payment period for another 30 days. However, such extension can only be granted on the mutual agreement of both parties involved. In addition, the extension of the payment period should be agreed upon in keeping with the terms of the initial agreement between the parties and cannot exceed a period of 60 days.
Healthcare service providers and public entities associated with healthcare delivery are exempt from the 30-day payment period. They are allowed to complete payments within a period of 60 days.
Penalties for Late Payments
The Directive also sets out the due process for creditors in the event of late payments. A statutory interest rate is applicable on late payments, which is set at 8% above the prevalent European Central Bank reference rate. The reference rate has been at record lows in 2020 and is expected to remain low in the foreseeable future, as the EU economies work towards recovery.
In addition, to the penalty mentioned above, the creditor is also entitled to receive a fixed sum of €40, as compensation for the debt collection cost. However, the creditor also has the right to claim payment for any additional costs associated with debt collection. The law also provides the creditor legal recourse in the event of any abuse of the contractual terms, associated with late payments. Courts and other public authorities are required to issue their decision on such cases within 90 days of the matter being filed.
The provisions of Directive 2011/7/EU have gained greater prominence against the backdrop of the ongoing economic uncertainties across the world. The protection this Directive can offer significant support to SMEs operating in Cyprus and within the EU.
Updated article: Delayed Payments in Commercial Transactions Law – Cyprus
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