Prompt payment

Prompt payment (신속한 지급결제) means a corporate obligor is required to pay to a claimant as soon as possible the proceeds of the goods and/or services provided by the claimant.

In Korea, it has been business customs and pracice to pay by the promissory note with maturity of two or three months, which coincides with the life cycle of the goods and/or services. During the IMF Crisis, a number of businesses went bankrupt because they could not been paid such claims on the immatured promissory notes.

So the government has urged big corporations to pay to their claimants either in cash or by an electronic promissory note.

Key words
payment, draft, promissory note, account receivables, CSR

Prompt payment as CSR
In Korea, big corporations have made it as a kind of corporate social responsibility (CSR) to pay to their supplier-creditors in cash taking advantage of short-term commercial loans backed by account receivables (외상매출채권 담보부대출), extended by their contracting banks. In other words, their banks provide loans in trust of long standing business relationship between the banks and big corporations. The banks are repaid by the big corporations' payment in full of such account receivables.

Prompt payment in EU
The European Union (EU) Parliament and the Council recently adopted Directive 2011/7/EU, which entered into force on 15 March 2011, and Member States have two years in which to implement it (i.e. by March 16, 2013 at the latest) and it is at this point at which Directive 2000/35/EC (the "old Directive") will be repealed.

The new Directive was proposed as the late payment of debts is still seen as a major problem in the EU and hinders the free movement of goods and services between Member States, distorts competition and is particularly detrimental to smaller businesses. The new Directive applies to all payments made as remuneration for commercial transactions, now applies to public authorities in their role as debtor, tightens up the old Directive and adds only a few real points of substance to the existing body of law.

Interest
The statutory interest applying to commercial debts under the new Directive has been expressly clarified and will be simple interest at a rate equal to the sum of the “reference rate” plus 8%. In the UK, as a non-euro currency, the “reference rate” will be the Bank of England’s interest rate, currently 0.5%. The relevant interest rate applicable will be that of 1 January for the first semester of the year in question or 1 July for the second semester of that year, as appropriate.

Commercial transactions between undertakings
“Undertakings” may be private or public and the provisions applying to such transactions are largely unaltered: (Article 3)

(i) If a payment period is not set out in the contract the debtor must make payment within 30 calendar days of the latest of:
 * receiving the creditor’s invoice;
 * receiving the goods or services; and
 * completion of verification or acceptance procedures which commence on the date of receipt of those goods or services. Such procedures shall not last more than 30 calendar days but this period can be varied by express agreement provided it is not “grossly unfair” to the creditor within the meaning of Article 7.

(ii) If a payment period is set out in the contract the parties can agree a payment period of up to 60 calendar days but any attempt to extend that period will only be valid if expressly agreed by the parties and if the extension is not “grossly unfair” to the creditor.

Commercial transactions between undertakings and public authorities
The new Directive will also apply to commercial transactions taking place between undertakings (be they private or public) and public authorities (as the debtor). The relevant provisions are very similar to those applying to commercial transactions taking place between undertakings but there are a number of small differences: (Article 4)

(i) If a payment period is not stated in the contract the debtor public authority must make payment within 30 calendar days of the latest of:
 * receiving the creditor’s invoice;
 * receiving the goods or services; and
 * completion of verification or acceptance procedures commencing on the date of receipt of those goods or services (where provided for by statute or contract). Again, this procedure cannot last more than 30 calendar days unless otherwise agreed in the contract and there is a requirement of “fairness” to the creditor undertaking here.

(ii) If a payment period is set out in the contract the parties can agree a payment period of up to 60 calendar days if a later deadline can be “objectively justified in the light of the particular nature or features of the contract”.

Payment Schedules
The new Directive allows parties to agree, subject to the provisions of national laws, payment schedules allowing payments in instalments. If an instalment is not paid by an agreed date, interest and compensation will be calculated solely on the basis of overdue amounts. (Article 5)

Compensation for recovery costs
Where interest for late payment becomes payable in commercial transactions between undertakings or between undertakings and public authorities the creditor is entitled to be paid a minimum fixed sum of €40 by the debtor. (Article 6) This sum is payable without the need for a reminder and as compensation for the creditor’s own recovery costs. In addition to this fixed sum, the creditor can also obtain reasonable compensation for any recovery costs exceeding that sum and incurred due to the late payment (these costs might include employees’ time chasing up the debt, legal fees or debt collection agency fees).

Unfair contractual terms and practices
The new Directive sets out more explicitly than the old Directive the provisions relating to what should be considered “grossly unfair” for the provisions above. (Article 7) In essence, a contractual term or practice relating to (i) the date or period for payment, (ii) the rate of interest for late payment, or (iii) the compensation for the recovery of costs, will be unenforceable or will give rise to a claim for damages if it is grossly unfair to the creditor.

The new Directive tells us that when considering if such a term or practice is unfair we should consider:

(i) any gross deviation from good commercial practice, contrary to good faith and fair dealing;

(ii) the nature of the product or service; and

(iii) whether the debtor had any reason to deviate from the statutory rate of interest for late payment or the fixed sum referred to in section E above.

If a contractual term excludes (i) interest for late payment or (ii) compensation for recovery costs it will be considered to be grossly unfair.

Transparency and awareness raising
The new Directive also contains provisions relating to ensuring its transparency and making its provisions publicly available and raising public awareness thereof. (Article 8)

As it can be seen, it is very much business as usual in relation to this body of law, subject to a handful of changes. The new Directive should not cause any major problems for UK commercial undertakings, or indeed public authorities.