October 2, 2018

Draft law on reducing payment congestion

On 19.09.2018, it was published Draft law on amending certain laws to reduce payment congestion. The law may cause a small revolution in the SME industry, and it is not without its impact on the factoring industry either. The existing solutions were considered ineffective, and the purpose of the new regulation, as indicated in the justification to the draft, is to "shorten payment terms and increase payment discipline in business transactions." The draft is at the consultation stage, and is expected to go to the Parliament in November, according to assumptions. Below I outline the most important changes resulting from the draft new law, including the possible impact on the factoring industry.

# Shortened payment terms in commercial transactions

Payment term specified in the contract may not exceed 60 days, calculated from the date of delivery of the invoice to the debtor:

if the debtor liable for payment is a large entrepreneur, and the creditor is a micro, small or medium-sized entrepreneur - unconditionally;
in other commercial relations (no relationship in which the creditor is a large businessman and the debtor is at most a medium-sized one) - also, unless the parties agree otherwise and provided that the arrangement is not grossly unfair to the creditor.

The importance of status is growing large entrepreneur and its negative consequences. For the purposes of the law, a new definition of a large entrepreneur has been introduced as an entrepreneur who is not a micro/small/medium entrepreneur. In addition, a presumption has been introduced that a debtor is a large entrepreneur if its individual data was made public in the BIP in the calendar year in which the contract was concluded (this is the this page and data of taxpayers in which the value of income received in the tax year exceeded the equivalent of 50 million euros and data of tax capital groups). Looking at it from this angle, almost all factoring companies affiliated with the Polish Factors Association can be considered large enterprises. Each factoring company will have to answer for itself to what extent the new law will apply to it. This is because, on the one hand, factoring services fall within the concept of a commercial transaction (the provision of services against payment in connection with an activity), but on the other hand, the provisions of the Commercial Transactions Act do not apply to contracts under which banking activities are performed within the meaning of Article 5(1) and (2) of the Act of August 29, 1997. - Banking Law. Meanwhile, according to Article 5(2)(5) of that Act, banking activities include the acquisition and disposal of monetary claims As long as they are performed by banks.

There is also a prohibition on debtors relying on a creditor's statement that shows that he is not a micro, small or medium-sized entrepreneur. If the parties stipulated a deadline for payment contrary to the wording of the law, then a shorter deadline shall apply and the creditor, if he has fulfilled his performance, shall be entitled to interest after this deadline.

What's more, a debtor who is a large trader is required to make a declaration to the other party to a commercial transaction that he or she has large trader status in the preceding fiscal year - at the latest at the time of contract conclusion. Thus, a new clause will appear in model contracts.

My initial assessment of this regulation:

I expect changes in the contracts used in business transactions, including the introduction of clauses recognizing debtors (e.g., purchasers of goods/services) as non-big business entities. There will also be an increase in the importance of contractual clauses already in use that contain exceptions to the Act to the extent that they justify the use of longer terms without grossly disadvantaging the creditor, e.g. due to the long turnover cycle of goods in the industry;
The significance of the regulation for permanent economic relations should not be great - where cooperation goes well - no one will enforce interest and compensation. The effects will occur only at the stage of judicial recovery;
In fact, however, payment terms should be shortened, especially where the creditor is a large trader. The above is due to the sanctions described later in the article;
The regulation should not pose a threat to factoring, although the reduction of payment terms from a range of 61-120 days to 60 days could indeed reduce interest in factoring among selected factoring companies. The opposite effect could occur in purchase factoring - large sanctions for late payments should increase interest in this product.

# Reporting of large taxpayers on payment terms

Large entrepreneurs will be required to submit a report on applicable payment terms to the Minister of Finance - annually by January 31. The report will be submitted online. A model of the report will be specified in an annex to the law. Failure to submit the report will risk a fine under the Fiscal Penal Code. Submission of a statement inconsistent with the actual state of affairs will be punishable by a fine and restriction of freedom.

My initial assessment of this regulation:

Reports are bound to be selectively reviewed, and those paying the latest can expect tax and antitrust audits, as well as fines as described below. The above should mobilize;
Any large entrepreneur, in order to cope with this analytical task, will probably be forced to update their company software to automatically generate data for the report. I expect the IT market to respond quickly to the act and update programs.

# Fines for late payments by large businesses

Large companies that pay too late are to be punished.... with an administrative fine of up to 5% of the year's unpaid liabilities on time. The penalty will be imposed only if overdue payments exceed at least twice the unpaid on-time receivables. For example - if a company is in arrears to contractors for 100,000 zlotys, and has itself received a late payment of 50,000 zlotys it will be fined by the National Tax Administration. However, if it received PLN 75,000 late - then it will no longer be penalized.

By design, the sanctions contained in the draft are not intended to punish large companies that are in arrears because they themselves do not receive their dues on time. In determining the amount of the penalty, the Head of KAS will take into account a number of circumstances indicated in the draft (e.g., the degree and circumstances of the violation, financial situation, degree of contribution, benefits, etc.). The decision will be appealable under the Administrative Procedure Code. The funds obtained from the penalties will constitute income to the state budget.

My initial assessment of this regulation:

It seems that there will be no escape from punishment. What is puzzling, however, is the low fine for failure to file the report. After all, without it, KAS will not have the necessary data to impose a penalty. I'm afraid that unaware but also aware calculating entrepreneurs will follow this path;
The answer to the risk on the part of, for example, the construction industry, unfortunately, may be delayed invoicing, or simply increased use of proforma invoices and other such combinations - admittedly, the law refers to the date of delivery of goods / performance of services, but this one is more difficult to verify when an invoice is not issued on time. Any such combination and especially the avoidance of timely VAT invoices is a threat to the factoring industry.

# Limiting compensation for the factoring and debt collection industry

The bill stipulates that if more than one monetary consideration or part thereof from the same commercial transaction is transferred to a third party, the third party (factor / debt collector) is entitled to one amount from the debtor for the collection of all the consideration or part thereof that became due before the date of its first action to collect any of the transferred consideration or part thereof. That is, for example, claiming receivables from 10 invoices, the factor will receive 1 rather than 10 compensations.

The project's justification indicates that the amendment is a response to the "phenomenon of cumulative compensation" and a fight against the mass pursuit of compensation from fragmented debt packages. "Accordingly, granting a secondary creditor (assignee) a single compensation for pursuing multiple matured receivables from the same debtor corresponds to the practice of pursuing these receivables together, and thus with the same actions, without incurring multiplied costs. The proposed provision of Article 10(4) balances the interests of the primary debtor and the secondary creditor of the receivables from the commercial transaction.". The change is expected to hit the debt collection industry.

Unfortunately, it may hit the factoring industry with a ricochet although to a limited extent - especially in the case of micro factoring - where there is a large number of fragmented invoices, and the factoring company sues the recipient of many overdue invoices and seeks compensation. However, it is hard not to resist the impression that the proposed regulations can be skillfully circumvented.

# Increase compensation by 1% of the principal receivable

In commercial transactions in which the creditor is a large business or public entity and the debtor is a micro/small/medium business - the amount of compensation for recovery costs (EUR 40) is to be increased by 1% of the principal amount owed.

Example: debt of 100,000 PLN - so far the compensation was 40 EUR, now it will be 40 EUR + 1% of 100,000 PLN (1,000 PLN) - so a total of about 1,170 PLN. Using this example - compensation has therefore increased by 85%. Most importantly, the law does not provide an exemption for increased compensation for the factoring industry.

# Bad debt relief

Here there will be a revolution. If the debtor has not made actual payment within 120 days of the due date - he must increase income by the value of the unpaid invoice. In turn, the creditor, after 120 days from the due date, will deduct the counterparty's unpaid amount from income. However, it must not be two years after the end of the year in which the invoice was issued. In addition, the debtor or creditor must not be in the process of restructuring, bankruptcy or liquidation proceedings.

My initial assessment of this regulation: In my opinion, this change will practically prove to be the most effective. This is because there is no turning back from it. Nothing will mobilize a debtor to pay more than the risk of excluding an invoice from the BUI and, at the same time, an increase in the tax to be paid.

# The right of the creditor to withdraw from / terminate the contract

It will be entitled when the payment deadline set in the contract is unduly extended, and the setting of this deadline was grossly unfair to the creditor.

My initial assessment of this regulation: This regulation should have little effect. Entrepreneurs don't bind themselves to contracts by force, so this law shouldn't provide any 'lifeline' - well, except perhaps for extremely unfavorable long-term fixed-term contracts. Perhaps it will also be used in other cases in which it is difficult to withdraw from contracts (e.g., public procurement).

# Imposing long deadlines an act of unfair competition

An interesting proposal is the recognition as an act of unfair competition of the use of excessively long deadlines for payment for products delivered or services performed, particularly in violation of the provisions of the Law on Payment Deadlines in Commercial Transactions. We deal with the imposition of such deadlines when their establishment in the contract is due to the debtor's use of a significant disproportion in economic potential between the debtor and the creditor in a manner contrary to good morals.

My initial assessment of this regulation: It's been a long time since we've seen this amendment to the MCC. This amendment should moderate the imposition of long payment terms by the major retail chains that are powerful actors in practice making suppliers dependent on them.

# Imposition of long deadlines on OKiK grounds

The draft law stipulates that it will be unlawful to enter into agreements the purpose or effect of which is to eliminate, restrict or otherwise violate competition in the relevant market, consisting in the direct or indirect imposition of excessively long payment terms for goods delivered or services performed, in particular violations of the provisions of the Act on payment terms in commercial transactions or other terms of purchase or sale of goods or services. It will also be unlawful for one or more entrepreneurs to abuse their dominant position in the relevant market by imposing such payment terms.

My initial assessment of this regulation: The penalties under the OKiK are huge, so this change could have a strong effect on the largest retail chains - those covered by the antitrust regulations.

# Acceleration of injunction proceedings

A simplification of the injunction procedure has been proposed - the court is to issue a payment order on the basis of the contract attached to the lawsuit and proof of delivery of the invoice to the debtor. In addition, the deadlines have been shortened:

In cases with a value of more than 75,000 zlotys, the creditor will have to prove satisfaction and the Court will issue an order / set a hearing within 2 months from the date of receipt of the lawsuit;
In a case with a value of up to PLN 75,000, the creditor will only have to give evidence of fulfillment and the Court will issue an order / set a hearing within 14 days from the date of receipt of the lawsuit;

In addition, the court is to add compensation and interest for delay in commercial transactions in favor of the creditor on its own motion (without the need to file an application).

My initial assessment of this regulation: The expansion of injunction proceedings has its pros and cons. Not everything can be dealt with by statute, and I have no doubt that the statutory deadlines will not be observed, and if they are, it will affect the speed of examination of the remaining cases, which will be prolonged at the expense of injunction cases. Interestingly, the aforementioned regulation shortening the deadlines applies only to cases based on contract and invoice, which means that Factors will help to enforce receivables only against counterparties/customers, but no longer against factors, where the basis of liability is most often a promissory note or a statement of submission to execution. These cases may take even longer than they have taken so far. In addition, there is no guarantee at all that the assignment of claims will qualify for faster proceedings. This is because the regulations are tailored to a classic economic relationship. Practice will show whether an assignee creditor will not be treated less favorably than a classic creditor under the proceedings. To sum up: This counterintuitive change could be detrimental to the factoring industry. On the plus side, compensation and interest are calculated ex officio.

# Long payment terms on the grounds of the PPL

The draft also provides for an amendment to the Public Procurement Law by establishing a fine for a contracting authority that enters into a contract in violation of the provisions of the Law on Payment Deadlines in Commercial Transactions.

# Long payment terms as a violation of public finance discipline

The draft also provides for an amendment to the Law on Responsibility for Violation of Public Finance Discipline, by, among other things, establishing that early payment of an invoice does not constitute a violation of public finance discipline, while such a violation is the conclusion of an agreement with a payment deadline exceeding the statutory deadline.

# Summary

The law is a nod to SMES and undoubtedly a blow to the biggest players - especially the large retail chains which are attacked by the law in every field (unfair competition, antitrust law, payment terms, reports, penalties). We can only wait to see what solutions the large chains will introduce in offsetting the effects of the new regulation. After all, if one were to collect all the sanctions provided for by the law and direct them toward an entity that persistently pays late - it will be a financial disaster for it. However, where the entrepreneur does not pay due to his own financial problems and not out of malice - these solutions can only accelerate his insolvency;
The law will undoubtedly have an impact on factoring industry and will require adjustments if only on the documentation side. Those factories that so far have not been interested in investigating the compensation for recovery costs are unlikely to be indifferent to a several-fold increase in this amount. In addition, the relationships and contractual provisions of factoring companies will change and their behavior should be closely monitored;
In addition, each factoring company should independently assess to what extent the Act applies directly to it as well - whether it is a large business and, if it is a bank, whether the factoring activities it performs fall under an exemption from the Commercial Transactions Act;
The impact of the bill on the different types of factoring should be considered separately. For example - when it comes to reverse (purchase) factoring then the law should lead to a more willing reach for this product. Since costs, penalties and sanctions for late payment of invoices are increasing - the more attractive solution becomes factoring for suppliers;
The law may partially adversely affect micro-factoring. A factor with small, fragmented receivables will find it more profitable to pursue payment of the debt on its own (multiple compensation) than through a factor who is then in a worse position;
Let's not forget that the law is at the draft stage - the end result may be significantly transformed from the current draft version;
The law is scheduled to go into effect on June 1, 2019, with the exception of the tax changes, which are scheduled to go into effect on January 1, 2020.;
Existing regulations are to be applied to contracts concluded before the law's effective date. This is a rather powerful gateway for circumventing the provisions of the law by entering into contracts before the law takes effect. It is unclear as to how the concept of contracts entered into prior to the entry into force of the Law will be applied - whether unit sales based on a framework agreement will be treated as legacy or no longer.