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Late payments are costly both for the companies in default (penalties, administrative sanctions) and for those which suffer from the late payments (cash flow shortage, chain defaults on payments).

Here is a reminder of the regulations and issues at stake to help you mitigate the risks in the context of dealings between professionals.

# 1 – Some facts and figures
  • Facts

The observatory of payment terms[1] (“l’observatoire des délais de paiement”) highlights two types of causes (beyond cases of deliberate bad faith by debtors) that underly late payments:

  • Structural causes: for example, malfunctioning or incorrect configuration of the company’s accounting software, or the use of external service providers that are sometimes located offshore and follow complex procedures;
  • Behavioral causes: for example, entering the date of receipt of invoices instead of their issue date in the accounting software, practices which remain uncorrected, or even cash flow difficulties.
  • Figures
    • 13.6: the average number of days overdue in [2]
    • € 11 billion: the estimate of the released net cash should all outstanding receivables and payables were paid, even if it were only within 60 days (2016 Annual Report from the observatory of payments terms) [3]
    • 2,678: the number of entities controlled in 2016 by the DGCCRF [4] , authority in charge of ensuring compliance with legal payment terms [5]
    • € 10.9 million: the total amount of fines incurred further to the proceedings launched in 2016 (228 fine proceedings initiated, resulting in 165 decisions representing a total of € 6.5 million and 63 on-going proceedings representing a total of € 4.4 million)[6]

                                                                                               Source : Annual Report from the observatory of payment terms

# 2 – Payment terms between professionals
  • By default, in the absence of a contract or general terms and conditions:

30 days from the date of receipt of the goods or performance of the service

  • Maximum authorized terms, subject to their being agreed upon in writing (i.e. included in a contract, in general terms and conditions, in the purchase order, etc.)
    • As a principle: 60 days from the issuance date of the invoice.
    • Derogation (under certain conditions provided by the French commercial code): 45 days end of month from the issuance date of the invoice.

There are 2 possible calculation methods to choose from: for example, for an invoice issued on March 1st

–   45 days + end of month –> Due date on April 30th: 03/01 + 45 days = 04/14 then 04/14 + end of month

–    End of month + 45 days –> Due date on May 15th: 03/01 + end of month = 03/31 then 03/31 + 45 days

–    Case of periodic invoices: 45 days end of month from the issuance date of the invoice.

N.B. Don’t forget to specify the selected calculation method in the contractual documentation.

  • Warning: please note that there are several specific regimes (goods delivered to French overseas territories, terms specific to certain business sectors, purchases of VAT-free goods to be delivered outside the European Union, etc.).

Our recommendations:

As a customer:

  • identify the payments terms to abide by (check the general terms of sale and/or contracts executed with your different providers/suppliers, make sure that the agreed deadlines comply with the applicable regulations);
  • plan regular monitoring of your obligations via the implementation of tools in order to mitigate the risks of unintentional delays and raise your teams’ awareness on “best monitoring practices”.

As a supplier:

  • check which regime applies to your activity(ies) (general/specific) and which terms (including calculation methods) are the most appropriate with regard to your needs and your organization;
  • make sure that your general terms and conditions and/or sales/supply contracts as well as your invoices specify the applicable payment terms and penalties in case of delay (see #3 hereafter), and make sure that they comply with the applicable regulations;
  • in accordance with our recommendation for customers, plan regular monitoring of your customers’ compliance with their payment obligations via the implementation of tools and raise your teams’ awareness on “best monitoring practices”.
# 3 – Penalties for late payment
  • Any overdue payment entitles the creditor to compensation: late payment penalties and a fixed compensation to offset recovery costs are due as from the day following the due date (whether it is the legal date or another date agreed upon between the parties).

These penalties and recovery allowance are payable without the need for a reminder or formal notice.

N.B. Very few companies suffering late payments (approximately 1 in 10) claim payment of these penalties and fixed compensation.

  • The late payment penalty rate:
    • By default: the interest rate applied by the European Central Bank to its most recent refinancing operation (accessible at this address) plus 10 percentage points(BCE rate in 2018: 0% + 10% = 10%)
    • The minimum rate that the parties may agree on: 3 times the legal interest rate)[7] (accessible at this address)(legal interest rate in the first half of 2018: 0.89% x 3 = 2.67%)
    • Calculation of late payment penalties: amount due (all taxes included) x interest rate x (number of overdue days/365)
  • The recovery allowance: lump sum set by decree; it currently amounts to € 40.

Our recommendations:

  • specify the rate of late payment penalties and the amount of the recovery allowance in your general terms and conditions, sales/supply contracts and your invoices;
  • if you suffer late payments, then, subject to an opportunity analysis (amount involved, tension in the commercial relations, etc.), remember to claim the late payment penalties.
# 4 – Administrative sanctions
  • The level of sanctions was increased in 2016 (“Sapin II” law):
    • Maximum amount of the administrative fine: € 2 million

NB 1: the administration may impose several fines against the same company without a limit as to the total amount in case of multiple infringements (e.g.: non-compliance with the maximum set by French law + non-compliant late penalty rates)

NB 2: in the event of a repeat offence within 2 years following a sanction decision, the amount of the maximum fine incurred is doubled (i.e. € 4 million).

  • Systematic publication of sanction decisions on the DGCCRF website: the aim is to deter defaulting payers by the reputational risk of a publication on a “wall of shame”.
  • Fines are not systematically imposed, as the DGCCRF may issue warnings or order the company to comply with its legal obligations

Our recommendation:

Anticipate the risks: do not wait for an inspection by the DGCCRF to ensure that your contractual documentation and your business practices comply with the regulations governing payment terms.

***

Controlling compliance with the legal payment terms is a core priority for the DGCCRF. In this context, and although it requires resources and time, minimize your risks by verifying the compliance of your suppliers’ invoice processing in order to abide by the legal payment terms.

Furthermore, in order to prevent late payments by your customers as much as possible, make sure that you clearly stipulate payment terms and late payment penalties in addition to implementing a monitoring and collection process.

[1] Annual Report from the observatory of payments terms
[2] https://www.economie.gouv.fr/entreprises/entreprises-delais-paiement
[3] Annual Report from the observatory of payment terms
[4] Directorate General for Competition Policy, Consumer Affairs and Fraud Control
[5] 2016 Results DGCCRF
[6] Ibid.
[7] Legal interest rate applicable to receivables between professionals