The EU rules on combating late payment in commercial transactions have a long legislative history, starting with a recommendation adopted by the European Commission in 1995 and ending with the current Directive 2011/7/EU (recast) (“Late Payment Directive”).

However, the Late Payment Directive appears to be outdated as it fails to protect businesses, and SMEs in particular, from asymmetries in bargaining power over payment terms. On average in the EU, one in two commercial invoices is paid late (or not at all) and one in four bankruptcies is due to unpaid invoices. Against this background, the European Commission published a proposal for a Regulation on combating late payment in commercial transactions on 12 September 2023, which was subsequently amended by the European Parliament on 23 April 2024.

Some novelties introduced by the proposed Regulation:

• Regulation: Unlike a Directive, a Regulation is directly applicable and sets out the same rules across the EU, thus benefiting businesses that rely on cross-border trade in the EU. However, the proposed Regulation gives Member States some flexibility (e.g. on enforcement bodies).
• Clarification on maximum payment periods: The European Commission proposed a single maximum payment period of 30 days for all commercial transactions, including B2B and Government-to-business (“G2B”). The European Parliament proposed an extension (i) up to 60 calendar days if expressly agreed in the contract (not for G2B) and (ii) up to 120 calendar days for the purchase of slow-moving or seasonal goods. Contrary the Late Payment Directive, the proposal removes the ambiguous concept of an extension of the maximum payment period ” if not grossly unfair to the creditor”;
• Interest and flat-rate compensation: The payment of interest and flat-rate compensation (50-100-150 EUR) is automatic and mandatory until the debt is paid. Contrary to the Late Payment Directive, the creditor cannot waive his right to interest if the debtor is a public authority or a large company;
• Limitation of the verification period for goods and services: a verification period may be provided for by national law if necessary due to the specific nature of the contract and may not exceed 30 calendar days;
• Enforcement and redress: Member States must set up enforcement authorities to monitor and ensure compliance with the Regulation. These authorities will have the power to receive complaints, initiate investigations and impose sanctions on late payers. In addition, creditors should be able to obtain an enforceable title within 60 calendar days of lodging a claim;

Further clarification is needed on whether the Regulation will apply only to contracts governed by the law of the Member States or to any EU person/entity irrespective of the applicable law (the former being more likely). Unintended and potentially undesirable consequences also need to be considered, e.g. the restriction of contractual freedom to negotiate payment terms could have a detrimental effect on the supply chain and trade receivables financing.

As the Regulation will be adopted under the ordinary legislative procedure, the proposal will have to be adopted by the European Parliament and the European Council. The European Council is currently working on its position, but it is not yet clear when the Regulation will be ready for publication in the Official Journal of the European Union. The new rules will apply 12/18 months after the entry into force of the new Regulation, to give parties sufficient time to adapt to the changes, with a potential 24-month delay where micro-enterprises and the self-employed are debtors.

To be continued…

Action points:

• Anticipate the adoption of the Regulation on combating late payment in commercial transactions;
• Anticipate the potential negative impact of an enforced 30-60 day payment limit on cash flows, working capital, liquidity and funding to avoid funding mismatches;
• Contact EY Law for the latest update on the proposed Regulation.