Suppliers need formal remedies for late payment says expert as Cameron proposes strengthening of Prompt Payment Code

Commercial law expert Ben Gardner of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the Prime Minister announced further measures to tackle late payments to small and medium sized enterprises (SMEs) in the supply chain. David Cameron said that the Government would consult later this year on how to strengthen the current regime, which could include new legislation or penalties.

"This is a welcome move for SMEs and it is encouraging to see that the issue of late payment is moving up the political agenda," said Gardner. "It is another step in the right direction from the Government and it will be interesting to see if the consultation delivers the 'giant leap' that is required to escalate the importance of prompt payment within large businesses."

"The consultation may be minded to investigate practices in other EU member states, such as France, in order to identify any modifications that can be made domestically. From the perspective of SMEs, something more than a 'voluntary' code or a 'discretionary' remedy is needed to tackle late payment; otherwise, the recent regulatory developments in both the EU and the UK will continue to fall short of what they set out to achieve," he said.

According to research undertaken on behalf of the Government, 85% of SMEs have experienced problems with involve payments over the last two years while 30% of those have had to use personal money or assets to boost their cash flows. Of those businesses that had experienced late payments, 66% said that they had had to wait more than a month past the agreed payment terms for a bill to be paid while 11% said that they had had to wait more than six months.

"It's not right that suppliers are not getting paid on time for the work they do and the services they provide and I know that late payment can have devastating effects on our small and medium sized businesses," the Prime Minister said at an event for small business owners ion the east of England.

"The Government has already taken steps to help address this issue but I am clear that more needs to be done to build a business culture across all sectors of the economy that sees the fair, prompt and reliable payment of suppliers become a core corporate responsibility which is taken seriously at the most senior levels," he said.

Among the issues that will be addressed in the forthcoming consultation are whether more can be done to strengthen the existing Prompt Payment Code and hold signatories to account, whether anything else can be done to increase transparency around which companies are prompt payers and which ones are not, and whether more can be done to enforce existing legislation. The Government is also keen to explore whether more can be done to encourage suppliers to use their existing statutory right to charge interest on late payments, or to use new technologies and services like electronic invoicing and mobile payments.

The Prompt Payment Code is a voluntary agreement promoting good payment practices, which was set up four years ago by the Institute of Credit Management. Code signatories, including a number of FTSE 100 businesses, are obliged to pay suppliers within an agreed time and to make sure that there is a proper process in place for any issues that may arise. In addition, EU rules on late payment of commercial debts which came into force in March require payment of invoices within 60 days unless the parties agree otherwise and the practice is not "grossly unfair".

"Businesses already have a number of routes for recourse if they are paid late, but the reality is that few choose to act on late payment for fear of fall out with their customers," said Katja Hall, chief policy director with business body the CBI. "The CBI backs the Prompt Payment Code but there are also other ways of addressing late payment - for example, some suppliers will choose to work with customers through supply chain finance agreements."