In England it has always been possible, by contractual agreement, to claim interest on a debt that was not paid on time. Such a contract being subject to rules regarding extortionate credit bargains, which were basically arrangements under which usurious rates of interest were being demanded.

Since 1981, creditors have held the right to recover debt in situations where there is an absence of any contractual right to interest. This could be done by claiming statutory interest in court proceedings. The rate of interest claimable being 15% per annum until 1993, and 8% per annum thereafter. This is the same rate payable on outstanding judgments. However, to claim statutory interest it was necessary to file suit. If a debtor paid the debt before suit was filed, there was no independent right to bring an action solely to claim the interest.

In the case of a claim for contractual interest, if the debt - but not the contractual interest - was paid before suit, suit could be filed for the interest alone. Whether or not it would be commercially worthwhile to bring such a claim depended on the amount of interest owed.

New Remedies

The Late Payment of Commercial Debts (Interest) Act was introduced in 1998. This ruling required 'major corporations' or 'public bodies' to pay interest at a punitive rate if they failed to pay their debts to small businesses on time. This was later extended to apply to debt owed by small businesses as well. With the introduction of the Late Payment of Commercial Debts Regulations on 7 August 2002, these rules were further extended to include all businesses of whatever size. As a result, interest can be claimed whether or not a contractual obligation to pay interest exists.

The rate of interest claimable is the "base rate" plus 8%. Base rate (which is similar to prime rate in the USA) is currently 4% in the UK, therefore, interest at 12% per annum can be claimed. It should be noted that the new rules do not detract from a creditor's right to rely on contractual arrangements, such as the right to claim interest at a higher rate than 12% per annum.

The Act also provides for the recovery of reasonable collection costs. Previously, only part of the fees and costs of the lawyers involved were recoverable from the debtor, and then only if legal action was taken. Now, it is possible to claim the reasonable costs of collection even without legal action.

What Exporters Need to Know

The new regulations, however, only apply to debts incurred after the coming into force of the regulations (7 August 2002) and then, only to domestic transactions, that is, those transactions between a creditor and a debtor both based in the UK. Non-UK creditors who have granted credit to a debtor in the UK can also take advantage of the regulations provided that the proper law of the contract is the law of England (and Wales), Scotland or Northern Ireland. An exporter to the UK must decide whether it is in its best interest for contractual arrangements to be subject to the law of the exporting country, or to accept the law of the UK country to which they are exporting - thus taking advantage of these new regulations.

The effect of adopting the law of a UK country would almost certainly mean that any dispute regarding the performance of the contract would have to be litigated in that country and not in the country of the exporter. This may not be a severe disadvantage because of the absence of any simple method of enforcing judgments obtained in US courts in the UK. Overall, it is preferable to avoid having to litigate twice. Once in the US, to obtain judgment, and then again in the UK, to enforce it. In these circumstances, the new regulations may provide some additional recompense to a creditor who has been kept out of his money by a slow paying debtor in the UK.

The EU Follows Suit

Rules similar to the Late Payment of Commercial Debts Regulations are being introduced into other member states in the European Union. Such rules fulfill member states' obligations under the European Directive 2000/35/EC on combating late payment in commercial transactions.

For those who are still unclear, the current members of the European Union are, in alphabetical order, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Ireland, Italy, Luxembourg, Portugal, Spain, Sweden, and the United Kingdom. In the near future there are likely to be a number of additional members to the European Union, including countries from the former Eastern Block.

A Word of Advice

Over all, the best advice to all potential creditors doing business in the UK is to incorporate into business dealings Conditions of Business and contractual terms that provide for the payment of interest.

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Steven Frieze is a lawyer and licensed insolvency practitioner specializing in international debt recovery litigation and insolvency law. He is a regular lecturer and author on these subjects. Steven has 30 years experience as a private practice lawyer. He is a partner in the firm of Brooke North with offices in London and Leeds, England. Brooke North has been undertaking international collection work for ABC for the last six years.

Credit-to-Cash Advisor is sponsored by ABC-Amega Inc., providing international receivable management and debt collection services for exporters to more than 200 countries including the United Kingdom. For more information, email info@abc-amega.com.