An Explanatory Note: Late Payments on Commercial Debts (Interest) Act 1998

It is not a widely known piece of legislation, but a brief insight in to what the purpose of this act is, and how it works in practice would be a helpful tool for anyone wanting to recover money in a commercial setting.

It doesn’t take a rocket scientist to appreciate that this legislation’s primary purpose is to support the person looking to recover debt. It does this by initially discouraging a debtor to be late in paying in the first place and also allows the creditor to be compensated for their debt if it does become late.

It supports businesses in four ways. It gives them the right to claim interest, costs, the ability to challenge certain terms by implying terms within, and lastly supporting a representative body that deems some contractual terms to be unfair. It must be noted that this legislation only applies to business against another business so is the commercial supply of goods and services.  Unless previously set out and fair on both parties, a payment is considered as late when it is unpaid for over 30 days and set out in more detail in section 4 of the act, entitled ‘Period for which statutory interest runs’.

The right to charge interest is clearly set out in section 6 of this act, which provides that ‘The Secretary of State shall by order made with the consent of the Treasury set the rate of statutory interest by prescribing a formula for calculating the rate of statutory interest or the rate of statutory interest. This essentially means that an interest of currently 8% above the base rate of the Bank of England can be claimed back for a commercial debt that is over 30 days overdue.

However, Section 5A is what grabbed my attention, especially from a legal prospective. It concerns compensation that can be recovered for debt recovery costs that have had to be paid out. There is a cap though, which currently stands at: –

(a) for a debt less than £1000, the sum of £40

(b) for a debt of £1000 or more, but less than £10,000, the sum of £70

(c) for a debt of £10,000 or more, the sum of £100.

This allowance came in to force on 16th March 2013 which is included in the claim application form and calculated under the heading legal representative costs.

Lastly, it is provided in Part 2 of the act at section 9, that a debt is considered substantial and is required to be substantial to proceed under this act. Specifically, it states at sub-section 1 that ‘A remedy for the late payment of the debt shall be regarded as a substantial remedy unless—

(a) the remedy is insufficient either for the purpose of compensating the supplier for late payment or for deterring late payment and

(b) it would not be fair or reasonable to allow the remedy to be relied on to oust or (as the case may be) to vary the right to statutory interest that would otherwise apply in relation to the debt.

To summarise, if an invoice is not paid on time, under the Late Payments on Commercial Debts (Interest) Act 1998, it allows for a commercial claim to ensue which includes a claim for interest, compensation and your reasonable costs of collecting the debt. Interest can be claimed at 8% over the Bank of England base rate and the recovery of costs are calculated on top of this, at a rate of £40 – £100 depending on the amount of debt.

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