Let's make it harder to avoid paying debts
It's not exaggerating to say that the rule of law is at the heart of western civilisation. A big part of this is the fact that people know that they are bound by their contractual obligations. If everyone knew they could walk away from their contracts scot-free, we'd have anarchy. If we choose to do so, we can use our legal system (with reasonable success) to hold people to their contracts and make them pay their debts. We should keep trying to make the process better - this article looks at some overseas innovations which New Zealand would benefit from.
The UK Late Payment of Commercial Debts (Interest) Act 1998 gave businesses a statutory right to claim interest from their business and public sector debtors on overdue accounts, even if it wasn't in their contracts. The rate of interest was the official dealing rate of the Bank of England on the date payment was due + 8%.
However, the European Commission then took steps to orchestrate a common approach to the problem of late payment across its member states. This was designed to change the practices of the many businesses which either intentionally use their suppliers as a bank by paying late (for example, in Spain, 62% of late payments fall into this category), or whose payment processes are inefficient and therefore pay late (e.g. in Spain, 10%). Studies showed that payment times across the EU varied from an average of approximately 32 days in the Scandinavian countries to 78 days in the south of Europe! Differing practices in terms of penalty interest were felt to be a major factor contributing to the different payment periods.
Changes as a result of the European Commission's directive were implemented by 2004. Perhaps the most interesting feature was that it allowed lump sum penalties as well as interest. Under the amended UK law, for a debt of up to £999.99, a creditor can claim £40 as compensation for having to chase the debt; between £1,000 and £9,999.99 the compensation is £70; and for debts of £10,000 and above the compensation is £100.
Of course, the obvious question is: don't I risk antagonising my customers if I use the legislation? The answer is, of course! At the moment, lots of New Zealand creditors have a contractual right to charge interest, but almost never enforce it because they don't want to risk upsetting and losing customers. However, a statutory right is a different beast to a contractual right. If all creditors have the same right to charge interest and compensation, and a significant number do so, I think many businesses will conclude that the easiest option is to pay all their bills on time. So I think it's likely to change business practices over time.
There's another factor that makes it easier to sue debtors in the UK and which is worth mentioning. Money Claim Online was set up in 2001. This online service allows UK county court claims to be issued for fixed sums up to £100,000 over the internet and is very popular with creditors.
Another potential innovation is closer to home, a piece of New South Wales law called the Building and Construction Industry Security of Payment Act 1999. We have a similar Act in New Zealand called the Construction Contracts Act 2002.
Both are designed to stop construction contractors and developers from unfairly delaying payment to subcontractors. The process starts with the issuing of a payment claim by the creditor. The debtor company can respond with a schedule setting out how much it intends to pay and, if it's not paying the whole debt, its reasons for not paying.
If it doesn't provide a schedule, or it does but then fails to make the promised payments, in both New South Wales and New Zealand, one of the options is that the creditor can sue. However, unlike the New Zealand Act, the NSW Act specifically says that, if the creditor sues, the debtor company is not allowed to bring any cross-claim or to raise any defence in relation to matters arising under the construction contract. In other words, if the debtor company doesn't say in its schedule, "we're not paying $X because the work was faulty," it can't raise this defence in court. If you snooze (by not responding with details of what you're not paying and why), you lose.
This has the benefit of forcing debtors to raise problems early and cutting out a lot of late, spurious defences. Many creditors will be familiar with the debtor who starts off by explaining that he has a cash flow problem and asking for more time but later on decides that the real reason he wasn't paying was that he was never happy with the service or goods. This NSW approach would stop that happening. Why not have law like this for all trade debt? If a debtor wasn't happy with the goods or service, s/he would have to tell you within a certain period of receiving the invoice. If not, you could get judgment for the full amount.
One argument against would be that it might make invoicing fraud easier. There are con artists out there who send fake invoices to businesses hoping that the payment processes in that business are lax enough for them to be paid. This sort of process might allow those crooks to take the next step and obtain a judgment. However, if it was thought that this might be a problem, I'm sure the legislation could be designed to deal with it.
In summary, the name of the game is to make it harder and more expensive for debtors to delay or avoid paying their debts and easier and cheaper for creditors to take action against their defaulting debtors. That's what these innovations do. New Zealand should pick up on them.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting. This article appeared in the New Zealand Mercantile Gazette in November 2006.