In an attempt to reduce the widespread practice of late debt repayment which causes many small business's considerable liquidity difficulties, the Government passed The Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”).
The Act provides you with a useful tool to recover a larger sum from the debtor than the client anticipated was due. The availability of interest running from an early date means the clients recovery costs are underwritten to an extent and makes debt recovery litigation more attractive to creditors.
The Act allows all businesses to claim interest if another business or public authority is a slow or late payer. Interest generally becomes payable at 8% above the base rate, 30 days after the debt was due.
Where the service or goods have been supplied the interest becomes payable 30 days after the later of the following two events:
- where the goods or services have been delivered; or
- the day on which the supplier gave notice to the purchaser of the amount of the debt
In order to prove notice the supplier should invoice the purchaser in the normal way. Notice does not require to be in any special form indeed no mention need be made of the Act at all.
For further information contact our expert Scottish debt recovery solicitors today on 0141 332 0913.
Where a credit period has been agreed interest runs from the end of the credit period. Thus where there is a stipulation of 90 days credit the interest runs from the 91st day.
Interest is calculated as simple interest. The base rates are fixed for a six month period. The applicable rate applies to the debt and does not then vary with time. Simple interest means that it cannot be compounded. The current interest rate is 8.5%.
Example: £500 is owed. The purchaser pays 18 months late after the 30 day period has expired. The base rate is 6% and 8% is added to this. Interest is therefor 14% on £500 which equates to £70 per year. The debt is 18 months late therefor interest due is £105.
Interest can also be calculated on a daily basis. Thus a £500 debt increases by £0.19 per day. (£500 *14% = £70, then £70/365 = £0.19).
The simplest way to recover statutory interest is to seek payment of the debt with interest running at the set rate from the date the interest was due.
In addition to claiming interest on a debt you can recover a fixed sum to compensate for the cost of recovering the debt. Where the debt is up to £999.99 then an administrative fee of £40 is due. Debts of between £1,000 - £9,999.99 result in an administrative fee of £70 being recoverable. A fixed sum of £100 is due where the debt is £10,000 or more.
You can contract out of the Act. Many contracts make provision for late payment. If a contract has such a provision the interest rate must be substantial otherwise the Court will rule that the clause does not apply and that the Act does. Anti-avoidance measures are unlikely therefor to work.
The Act applies where the contract is governed by the law of the United Kingdom or its constituent parts. Some contracts stipulate that the contract is governed by the law of England and Wales or Scotland. If this is the case the Act applies.
Normally where the contract has a substantial connection with the UK or where payment is to be made in the UK that would mean that the Act applied.
For further information on our Debt Recovery services please call John Carruthers on 0141 332 0913 or 07764 253 998