• the right to claim interest for late payment;

• the right to claim reasonable debt recovery costs, unless the supplier has acted unreasonably;

• the right to challenge contractual terms that do not provide a substantial remedy against late payment;

• the right for “representative bodies” to challenge contractual terms that are grossly unfair on behalf of SMEs.

Guidance:

The first part of this section will address the right to interest and reasonable compensation for debt recovery costs. The second part will deal with contract terms.

Don’t I risk antagonising my customers if I use the legislation?

Using the legislation is your statutory right and is not designed to jeopardise existing customer relationships. Rather than seeking to encourage claims for interest and/or debt recovery compensation, the legislation’s primary aim is to deter companies from paying their bills late. By treating the legislation as an integral part of your payment terms, customers will become educated to the fact that this is part of the way that you like to do business.

It is worth knowing that, within the Republic of Ireland, you have six years which to make the claim for late payment interest and compensation. Even if you have stopped supplying the customer.

Part 1. Late payment interest and reasonable debt recovery costs

When can I claim either or both of them?

Claim(s) can be made once a payment is deemed late. Remember that if your contract makes provision for late payment interest, the statutory right to interest and the right to reasonable debt recovery costs will not apply. You may wish to contract for reasonable recovery costs to cover the event of late payment or if you are litigating you may be able to recover from the court some of the costs and disbursements incurred or some of your reasonably foreseeable losses flowing from the late payment.

When is a payment late?

Where there is an agreed credit period, and the supplier has agreed, either in writing or orally, a credit period with the purchaser, the payment is late if it is made after the last day of the credit period.

If no credit period has been agreed, then the Act sets a default period of 30 days after which interest can run. This default period does not constitute a statutory credit period. Where no credit period is agreed in a contract, the principal debt will still become due from the moment the goods are delivered or the service performed.

The 30-day default period starts running from the later of the actions:

• the delivery of the goods or the performance of the service by the supplier; or

• the day on which the purchaser has notice of the amount of the debt. A payment is late once the agreed credit period or the default period has expired.

What happens if the contract requires advance payment(s)?

There are several ways in which a contract can require payment(s) to be made before the goods are delivered or the service is performed. The Act does not give a right to interest unless at least some of the goods have been delivered or part of the service performed unless contractually agreed. If the parties wish to agree otherwise, they will need to make provision in the contract for a substantial remedy instead of statutory interest.

Some contracts stipulate that the whole contract price should be paid before the goods are delivered or the service is performed. If payment has not been made before the goods are delivered or the service is performed, then statutory interest starts to run from the day after the day on which all the goods are delivered or the whole service is performed.

Other contracts stipulate that payment should be made by instalments in relation to a delivery of any part of the goods or performance of any part of the service. Where payment of such an instalment is made late then statutory interest runs on the instalment from the day after the day on which the part of the goods are delivered or the part of the service is performed.

Finally, where an advance payment forms part of the contract price, but is not related to the delivery of some of the goods or performance of part of the service, then statutory interest runs from the day after the day on which all the goods are delivered or the whole service is performed.

What happens if there is no agreed credit period but the purchaser usually pays at the end of the month following the month in which the invoice is received?

Some purchasers and suppliers have a long-standing relationship in which this kind of payment arrangement has become standard practice. In these cases, the credit period is considered to end on the last day of the month following the month in which the invoice is received. Interest starts to run on the next day.

Where either:

• the purchaser is dealing with a new supplier; or

• there is any other reason to doubt whether this kind of arrangement can be regarded as established practice between the supplier and purchaser

• the purchaser should ensure that there is an agreed credit period – otherwise the default period of 30 days might apply.

Part 2. How do I make a claim for interest and/or reasonable debt recovery costs?

When the payment is late, a supplier should inform the purchaser that he or she is claiming interest on the late payment under the late payment legislation. It may be helpful to indicate the daily rate of interest that will be claimed, although it is not necessary to do so. The amount of compensation for debt recovery costs available is determined by the table below, which the supplier can refer to.

The compensation entitlement varies in accordance with the size of the debt:

• Debt Up to €999.99  -  €40.00

• €1,000.00 to €9,999.99  -  €70.00

• €10,000.00 or more  -  €100.00

For the purpose of claiming interest and/or compensation for debt recovery costs notification can be oral, but it is better to put it in writing, as this makes it easier to prove that notice has been given. It is necessary to provide all the information that should be carried on a standard invoice:

• how much is owed (it may be helpful to provide the total amount of interest owed at the date of the invoice for interest, and, if the principal has not been paid, the rate at which the interest will continue to accrue);

• the amount owed, and what it is owed for (stating which principal debt it relates to, quoting the original number of the invoice that requested payment of the principal debt);

• to whom payment should be made;

• by what date;

• to what address; and

• by what method the payment should be made (e.g. cheque, electronic transfer etc).

How should I inform purchasers that they will be charged interest and/or reasonable debt recovery costs if they pay late?

Rather than using it as a last resort when faced with an overdue invoice, the late payment legislation is designed to be a deterrent against late payment, and to be used as part of standard business practices and credit management techniques. In much the same way as a supplier reminds purchasers that payment is due within a specified time limit, the supplier should also remind them that interest and compensation for debt recovery costs will be charged on overdue invoices using the entitlements provided by the late payment legislation.

In addition to informing purchasers verbally of their right to charge interest and/or claim compensation for debt recovery costs as part of standard payment terms, suppliers should state clearly on all written communications, credit application forms, order confirmations, invoices and all contracts:

“We understand and will exercise our statutory right to claim interest and compensation for debt recovery costs under the late payment legislation if we are not paid according to agreed credit terms.”

Do I have to charge interest and/or debt recovery costs to all late payers?

No. It is not compulsory to use the late payment legislation. A supplier is free to decide whether or not to make a claim for interest or compensation for debt recovery costs.

How do I calculate how much late payment interest to charge?

Click on the image below to download a simple Excel spreadsheet to calculate the late payment interest you are legally entitled to levy on overdue invoices:

According to FLAC and IICM, there have been reports that some debt collectors in Ireland have used intimidatory and unscrupulous practices in the pursuit of debtors and, in their view, regulation would help get rid of the “cowboy” debt collectors and help establish an Irish debt collection code of conduct to deal with issues such as how often and what times in the day/evening collectors should call or visit debtors.

While we fully agree with the need to regulate and license the debt collection industry in Ireland, we would also argue that creditors and/or their agents should be allowed to exercise legitimate means to pursue unpaid monies from debtors. We therefore need to look closely at whether the Irish judicial system is currently up to the task. It seems obvious that if the legal system was less costly and more streamlined, particularly in the case of uncontested debt collection matters, creditors would be less likely to look to the so-called “cowboy” debt collectors to recover their debts.

Let’s not forget that, in many of the cases which are passed on to debt collectors, a creditor would have probably tried (and failed) many times to recover the debt using amicable means. Handing over the debt to a debt collection agency is very often a last resort. And, because a debtor possibly ignored peaceful efforts in the past to collect the debt, a creditor may be quite happy for a collection agency to employ more heavy-handed tactics. Any small business or individual that has been in the position where it has been owed money will fully understand the creditor’s position.

Yes we agree there ought to be regulation of debt collection services in Ireland, but let’s not forget that small and medium sized businesses are failing every day because of cashflow problems caused by debtors’ failure to pay legitimate bills. In Irish debt collection cases, as with most things in life, there are two sides to every story. It’s just a shame that, with organisations clamouring to uphold the rights of debtors, the rights and livelihoods of creditors are far too often being ignored.

Small Claims Court Ireland Online

Before you rush off to sue every Tom, Dick and Harry, take note that only the following types of claim are eligible:

• A claim in respect of goods or services bought for private use from someone selling them in the course of a business (consumer claim).

• A claim in respect of minor damage to property (but excluding personal injuries).

• A claim in respect of the non-return of a rent deposit in relation to a holiday premises (actions relating to rent deposits for places of residence must be brought to the Private Residential Tenancies Board.)

Get more information and advice about the Small Claims Court procedure in Ireland by downloading the following PDF guide:

A Guide to the Small Claims Court in Ireland

Introducing the new Small Claims procedure Minister Ahern said

“The new rules will facilitate claims from a business against another business in respect of goods or services not exceeding €2,000. This Government is conscious that all businesses, but small businesses in particular, have been significantly affected by the very difficult economic situation that this country is facing. Businesses, as well as consumers, can find themselves in a position where they have a legitimate claim against another business or vendor in relation to a contract in respect of goods or services purchased.”

Sounds like a great idea doesn’t it? On first reading, it appears the Minister has introduced something useful for once which will enable Irish businesses to issue legal proceedings themselves in the Small Claims Court (provided the debt is less than €2,000), thus doing away with the need for costly legal proceedings and solicitors. However, on further inspection, there are certain caveats which which suggest this won’t be a panacea to the problem of slow payers and bad debts.

The new Small Claims procedure amends District Court Rules (Order 53A of the District Court Rules 1997). The consumer or business must have purchased goods or services from someone selling them in the course of business. Claims cannot be made in respect of debts, personal injuries or breach of leasing or hire purchase agreements. The procedure provides an alternative and complimentary mechanism to the civil bill procedure.

So, it seems the Small Claims procedure in Ireland can’t be used for business to business debts. The most frustrating thing is that this was a perfect opportunity to introduce legislation which would have allowed businesses in Ireland (partricularly SMEs) a cheaper, fasttrack way of suing debtors. But if, as it seems, this isn’t the case, you kind of wonder what useful purpose it’s going to serve.

Late payment problems aren’t confined to small businesses. Large firms have also seen cash flow problems skyrocket as customers take longer to pay for goods or services supplied, while banks have reduced overdrafts and other working capital support.

“A sale isn’t a sale until the money’s in the bank”. The fact is, while a company may experience an increase in the number of orders placed and invoices issued, unless adequate credit control policies are enforced from the outset, there may be delays in collecting payments or, worse still, much of the sales ledger may end up as bad debt.

Top 10 Credit Control Tips

1. Ensure you have a robust but flexible credit control policy. Agree specific parameters and stick to them.

2. Check credit references thoroughly. It’s not uncommon for a potential debtor to tender “friendly” referees when applying for credit. Take advantage of your network of contacts within the industry and check ALL known suppliers within your trade.

3. Know who you’re dealing with. Make sure you know the correct legal entity of the customer you’re trading with as this will dictate who you will need to pursue if a bad debt arises. If it is a Ltd company, consider asking one or more of the Company Directors to sign a Personal Guarantee, making them personally liable for the company’s debts.

4. Make sure your Terms & Conditions of trade are exhaustive. Include a watertight Retention of Title clause and outline exactly how you will handle queries and disputes. Explain what will happen in the event of a bad debt and whether late payment interest will be charged.

5. Regularly review your sales ledger. Ensure your credit controller has issued all the relevant credit notes and the balances on the ledger are correct. DO NOT put off issuing credit notes as this will only delay the process of cash collection. Conduct a credit control review at least once a month.

6. Regularly review credit limits. Credit limits are not static – they can be reduced as well as increased. If a customer is ordering significantly more than normal, it could suggest that they have been disallowed credit elsewhere because of payment problems.

7. Avoid wearing your sales hat when making credit control decisions. Take a commercial view based on the profitability of the account, the customer’s ability to pay, their reputation and their trading history with your company.

8. Don’t become a free overdraft. Habitual late payers and bad debtors can significantly impact on your cash flow. By not paying your invoices, the debtor may avoid using their own overdraft while placing you in an embarrassing position with your own suppliers.

9. Proactive credit control equals respect. The fact is, most companies only pay when they are asked to do so. If you take an active, professional approach to chasing invoices before the due date, this should ensure your payment is on the next cheque run. If it is not, then you have an opportunity to address any issues that may delay payment.

10. Credit control and debt collection outsourcing. Companies who don’t have the in-house systems, expertise or knowledge to manage their credit control have the option to outsource part or all of their function to specialist 3rd party agencies. Potentially this could free up valuable time and resources while allowing an experienced team to manage the debtors’ ledger on your behalf.

In theory, it’s possible to avoid bad debts altogether However such a zero risk strategy is likely to stifle overall profitability. The aim of any successful business should be to achieve maximum profits by balancing risk and profit. This is what an effective credit control policy should set out to achieve.

As the saying goes – “Turnover is vanity, profit is sanity, but cash flow is reality”.