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Commentary of the Union of Entrepreneurs and Employers on regulatory proposals how to remedy the problem of payment blockages



Warsaw, 18th May, 2018

 

COMMENTARY OF THE UNION OF ENTREPRENEURS AND EMPLOYERS ON REGULATORY PROPOSALS HOW TO REMEDY THE PROBLEM OF PAYMENT BLOCKAGES

 

Delayed payments between entrepreneurs are one of the most serious economic problems in Poland. Our country is not, of course, the only one suffering from this issue – no member state of the European Union has developed a fully effective solution, and payment blockages constitute a major problem also abroad. Research shows that more than 80% of entrepreneurs have come across delayed payments in Poland. One must bear in mind that the group of entities for which payment blockages are a particularly dangerous phenomenon are entrepreneurs from the SME sector. The reasons are twofold. First of all, as a rule, it is them – as subcontractors, alternatively simply smaller contractors – that have to wait for payments for services rendered or products sold for an absurdly long period of time. Secondly, the effects of untimely payments from invoices issued are much more severe for them than for large entities. Payment blockages make it very difficult for them to continuously plan their finances, have a negative impact on their liquidity, and – in extreme cases – may lead to bankruptcy.

Taking the above-mentioned facts into account, we take the position that there are two dimensions to the problem with payment blockages. The first one is a problem taking place already at the contracting stage when, at the time of signing the contract, the smaller contractor is de facto forced to accept and extended the invoice payment period. Due to the large difference in counterparty strength, as well as their scale of operation and market position, small companies accept unfavourable contractual provisions. The second dimension manifests itself after the service has been completed or the goods delivered, when the payment is made within a longer period than is required by the contract. In this case, entrepreneurs from the SME sector are in a much worse position than their larger business partners. As research indicates, they do not exercise their rights granted in the “Act on payment periods in commercial transactions” to charge interest or to demand a flat-rate compensation for the costs of recovering a claim in the amount of EUR 40. Sometimes this is a consequence of ignorance, but often it is out of fear of losing a contractor. One must remember that the companies in question are often small subcontractors or suppliers working for large networks.

First of all, in order to effectively fight against the phenomenon of trade credit extortion on small companies, it is necessary to take into account in the proposed regulations that small entrepreneurs, due to their incomparably weaker position on the market, will not usually be willing to use the tools available to them to collect their debts on time, or debts increased by interest and additional fees.

The proposal presented by the Ministry to solve the problem of payment blockages by means of specific tax sanctions (increasing the debtor’s tax base by the amount of debt resulting from late payments, and likewise lowering the creditor’s tax base by this amount) we consider noteworthy and fair in its essence. It should be remembered, however, that it would only partially solve the problem associated with not being paid on time, which often leads to financial liquidity-related problems for the company. Tax tools can be useful in the fight against payment blockages, but it is doubtful whether they alone will constitute an effective enough solution.

In connection with the statement above, we would like to propose a directional bi-module solution, which in our opinion may indeed lead to a significant reduction in payment blockages. As part of the proposed regulations, we would address both of the aforementioned issues related to the problem of late payments. At the same time, we would like to point out that these are prototype proposals that will certainly require further refinement and clarification in the course of potential legislative works.

We propose that the catalogue of acts of unfair competition be supplemented with the use of market position in order to force suppliers or service providers to accept grossly long payment deadlines. Such action should be subject to a fine. The issue of precise naming of this act is also discussed, as well as its premises (one can assume that a deadline exceeding 60 days could be recognised as a grossly long period, and that the disproportion in the size of contracting companies could be a premise of market position abuse, as well as the regular nature of contractual infringement). At the same time, we must remember not to interfere too much with the freedom to conclude contracts, while designing solutions in this area, as it is an absolute fundament of the free market economy.

Regarding late payments, we suggest two-way actions. First of all, following the British model, we postulate the introduction of mandatory reporting to the President of the Office of Competition and Consumer Protection of data and information on payments made by large entities. The issue of the frequency of such reporting remains a matter of debate – it seems that taking into account both the necessity of effectiveness of the proposed solution and the principle of proportionality in imposing new obligations on companies, it would be optimal to submit a similar report every quarter. In the report, large entities would have to clearly indicate in a separate section the amount of late payments (both aggregated and divided into individual transactions), the payment deadlines specified by contracts, the invoice issue dates, as well as the data of contractors whom they owe money. The Office could use this data, for instance, to create annual statements that reliably regulate the liabilities of contractors. The introduction of the reporting obligation would also allow for a deeper understanding of the problem of payment blockages and for the identification of industries in which this problem is particularly severe.

In connection with the introduction of the above-described solution, it would be possible to grant the President of the Office of Competition and Consumer Protection the right to put forward a motion to initiate enforcement proceedings. The President, acting in the interest of and for the benefit of the creditor, would request the enforcement of amounts increased by both the interest resulting from the Act and a flat rate compensation of 40 euros, as well as enforcement costs. This way, the risk of losing a contractor would be removed from micro, small and medium-sized enterprises (because the enforcement of receivables increased by interest and compensation would not result from activities undertaken by them). At the same time, large entities in the face of the need to pay the amount resulting from the invoice, plus interest, compensation and enforcement costs, would be much more willing to pay invoices on time. Of course, due to the calibre of this tool, the said power should be vested in the President only in special situations, i.e. in the case of gross delays in payment (the premises should be specified in a potential legal act; one can assume that a delay exceeding by 30 days as per contract might be considered a gross delay, or no special circumstances justifying the delay in payment). Moreover, before the motion would be submitted, the President should send the debtor a pre-trial request to pay the designated amount to the creditor. The aim of such a solution would be to limit the number of initiated proceedings (we assume that a large part of debtors would decide to pay the debt voluntarily after receiving such a summons), which would have a positive impact on their duration.

Implementation of the above-described regulations would de facto mean transferring the issue of limiting payment blockages to the competence of the President of the Office of Competition and Consumer Protection. This seems to be a reasonable solution – the President is a body of the central government administration competent in matters of competition and consumer protection, i.e. its activities include actions aimed at combating practices restricting competition. According to Art. 31 item 3 of the “Act on competition and consumer protection”, the scope of the President’s activities also includes conducting research on market behaviour of entrepreneurs. As payment blockages often cause that entrepreneurs are less willing to invest and therefore do not develop, there is no doubt that delayed payments have a significant negative impact on competition. We are dealing with a situation in which some entities, not through fault of their own, are temporarily deprived of funds due to late payments and unsettled invoices. As the problem of payment blockages also impacts industries affected by the grey zone, late payments often aggravate the competitive position of entities honestly accounting for all public-law obligations. Subsequently, transferring the issue of researching and counteracting the problem of payment blockages to the President of the Office of Competition and Consumer Protection seems to be justified and advisable.

Apart from the above-mentioned activities, we would like to propose a number of complementary activities. Above all, we advocate that the legislator refrain from taking actions that legally limit the possibility of using the methods of managing receivables that are conducive to maintaining the financial liquidity of a given entity. A prominent example are public hospital suppliers who pursuant to Art. 54 sec. 5 of the “Act on medical activities” are de facto deprived of the possibility of selling their claims against the hospital (consent must be expressed by the creating entity – the law does not specify the mode thereof, nor is there an appeals procedure). We therefore propose to repeal this harmful provision and refrain from proceeding with changes that may further restrict the use of tools such as, for instance, factoring. In addition, we propose some interference in the principle of freedom of contracting (important especially in economic relations), namely the recognition of a contractual ban on the transfer of rights to receivables as a prohibited clause. Due to a number of undesirable phenomena taking place in the economy, one can imagine the creation of a whole catalogue of abusive clauses relating precisely to business-to-business relations, and not only, as it presently is, to business-to-consumer relations. Among such clauses one could distinguish, among other things, the prohibition of transfer of rights. Other proposals of abusive clauses in business should be developed in the course of cooperation between entrepreneurs and the legislator. The aim of these actions would be to limit the phenomenon of abuse of the contractual advantage of large entities, which is manifested not only by extended payment periods. As of now, the “Act on counteracting unfair use of contractual advantage” is in force, but it only applies to trade in agricultural and food products. It would be worth solving the problem on the scale of the whole economy, and due to the limited resources available to the Office of Competition and Consumer Protection, it seems to be a good solution to create a catalogue of abusive clauses in business.

Regardless of the recommendations listed above, we point to the judiciary as a key element in counteracting market pathologies. Only in a situation in which the proceedings in the economic case will last for a reasonable time, it will be possible to independently enforce the claims by the interested entities. For this reason, the Union of Entrepreneurs and Employers has for a long time postulated a simplification of judicial procedures in commercial cases, especially the smallest ones. If the value of the dispute does not exceed tens of thousands of zlotys and the parties involved are entrepreneurs, the proceedings should be carried out in a maximally simplified and informal manner, while maintaining the highest possible procedural economy. We also postulate the introduction of the principle of the trial hearing day by day.

We hope that the proposals presented will be of interest to representatives of the Ministry of Entrepreneurship and Technology. We are well aware of their draft character and that it would be necessary to thoroughly discuss them in detail. We believe, however, that they provide an adequate response to the challenge of payment blockages gnawing at Polish economy.

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