An urge for amendments to the Law on Deadlines for Settlement of Monetary Obligations in Commercial Transactions
Amid the Covid-19 pandemic, the economies of many countries are stagnating. As turnover of goods and services has decreased, many business entities are forced to take radical measures, such as dismissal of employees, reduction of wages, liquidation, or deliberate delays in payment, to save money and settle their debts due before or during the pandemic. As the pandemic hit the small and medium-sized businesses the hardest, but the large companies as well, the problem is quite complexed, and the legislator should take serious measures to address it.
The Law on Deadlines for Settlement of Monetary Obligations in Commercial Transactions[1] (the “Law“) applies in our law as of 31 March 2013. Since then, the Law has been amended on three occasions, in 2015, 2017 and 2019. However, it seems that, despite the changes, the Law still has certain limitations.
This Law was passed primarily for the purpose of harmonizing the law of the Republic of Serbia with the law of the European Union. In 2011, the Council and the Parliament of the European Union passed the Directive on Combating Late Payment in Business Transactions 2011/7/EU (the “Directive”), which regulates the deadlines for settling monetary obligations in commercial transactions between the private and public sectors, among public sector entities themselves, as well as among private sector entities themselves.
Legal regulation
The Law states that if nothing is agreed, or there is no written agreement, or a longer term is contracted, in commercial transactions between private sector entities (contracts related to trade of goods and services), the compulsory statutory 60 days deadline will apply as of the day of the obligation settlement, or of the invoice receipt, depending which comes later.
It is unclear why the legislator stipulates that if there is no written agreement, the deadline of 60 days will apply, instead of the deadline agreed by the contracting parties verbally. The fact is that oral contracts are valid and effective unless the legislator prescribed a special form of the contract. Thus, it cannot be considered that nothing has been agreed about the payment deadline if there is no written contract. After the expiration of the 60-day period, if the debtor still has outstanding debt, the creditor is entitled to interest on arrears and can charge the statutory penalty, too.
The Directive, unlike the Law, prescribes a 30-day deadline (in very exceptional circumstances, 60-day) for the goods and services that public authorities procure, if the date of payment, i.e. the payment deadline is not specified in the agreement, or a longer period is set, after which the creditor is entitled to interest on arrears counting from the date of the invoice receipt or the obligation settlement, depending on which comes later. As is the case with the Law, the Directive prescribes that enterprises have to pay their invoices within 60 days.
Although the Directive stipulates the 60-day deadline for enterprises, a very important difference between the Directive and the Law is that the Directive allows granting longer deadlines, unless they are grossly unfair for the creditor. The Law, on the contrary, allows granting longer deadlines only if the debtor provides an unconditional, irrevocable bank guarantee payable on first call or a bill of exchange endorsed by the bank.
Thus, the Directive considers the principle of autonomy of will as one of the most important ones and allows longer deadlines to be stipulated. The Law, on the other hand, suppresses the autonomy of will (if we disregard delivery of guarantees), and the creditor and the debtor cannot agree on a debt payment in a longer period, even if it is in the interest of both parties (e.g. both the creditor and the debtor want to agree a payment in 6 months).
It is very much arguable whether the legislator is entitled to restrict the autonomy of will in this way, so it could “protect” small and medium-sized enterprises (“SMEs”), rejecting the possibility that there may be a situation where a longer deadline is more favorable for both parties. In our opinion, the legislator should have left the principle of the autonomy of will untouched for transactions between private sector entities, leaving them to stipulate the deadline they find suitable. On the other hand, the protection of SMEs could have been achieved by stipulating the provisions which would oblige the debtor to pay the debt within the 60-day deadline in case the deadline has not been agreed between the parties. Nonetheless, we find that the legislator unreasonably interfered with the contractual relationship between two parties from the private sector, suppressing their will, thereby eradicating the general principles of the contract law.
The Law further stipulates that, if a longer deadline is agreed, the compulsory deadline for payment of monetary obligations between the public sector entities in commercial transactions is 60 days from receiving the invoice or settling the obligation, depending on which comes later. The 45-day deadline is prescribed by the Law when the creditor of a monetary obligation is a private enterprise, and the debtor is the public authority. If the debtor is the Republic Pension and Disability Insurance Fund and the Republic Health Insurance Fund, then the deadline for settling the monetary obligation is 90 days from receiving the invoice or settling the obligation.
The next difference between the Directive and the Law seems to be the biggest one, and it concerns a compensation for recovery costs that the creditor has the right to demand from the debtor, as a kind of fine for a delay in payment – as defined by the Supreme Court of Cassation in response to commercial court inquiries.
A compensation, or a one-time lump sum fee – as it is also called in reference literature, has been widely criticized by legal experts in the Republic of Serbia. This is because a fine is not common in civil law, and even less in commercial law, in the sphere of private legal affairs, and the experts are rightfully trying to determine its legal nature. The compensation is prescribed by the Law as a fixed amount of RSD 20,000, while the Directive prescribes the compensation in the amount of EUR 40. It is quite obvious that the difference in the amounts of these two compensations is huge.
The only question is whether the amount prescribed by the Law is too severe, or whether the Directive determines a petty penalty.
When speaking about the compensation, the creditor is always entitled to it when the debtor is due for payment. Both the Law and the Directive determine it in a fixed amount, but the Directive defines it as a fee for the creditor’s own costs. In that sense, this fee should be interpreted as a loss incurred by the creditor for the collection of receivables (e.g. checking business books, sending a letter of warning to the debtor, etc.). This does not include the additional creditor’s costs, outside its internal organization, in terms of hiring a lawyer, or a collection agency, etc. The creditor is entitled to reimbursement of these costs, too. On the other hand, it does not seem that the compensation prescribed by the Law was in its nature meant just to cover the creditor’s loss related to internal debt collection. Having in mind the amount (RSD 20,000), it looks more like a severe penalty, whereby the creditor will certainly profit from it, and not just cover the losses. Again, this is opposite to the general principles of Law on Obligations, since this act stipulates that no one can profit from the damages it suffered, but it is entitled to restitution in the amount that is required to cover the damages, and nothing more.
Therefore, the compensation, first, should not serve the purpose of punishing the debtor, and second, should not serve the purpose of the creditor’s enrichment, but only to settle the creditor’s internal costs. This is supported by the fact that neither the Directive nor the Law regulate the payment of compensation as a percentage of the monetary obligation (when it could be interpreted as a fine), but in a fixed amount.
Having in mind the above, we conclude that the amount of RSD 20,000 is way too much for the creditor needs to reimburse its internal costs, because it is not intended to punish the debtor, although it can sometimes deter the debtor from late payments, especially when the amount of its debt is less than RSD 20,000. On the other hand, if the debt significantly exceeds RSD 20,000, it is difficult to expect that RSD 20,000 would deter the debtor from delayed payments, if he considers that he can make a certain profit by being late. Instead of prescribing the fix amount of compensation, the legislator should have considered the introduction of the payment of a fine as a percentage of the debt amount, which would especially deter debtors with large debts from delays, which is primarily the goal of both this Law and the Directive.
The last issue we identified about the Law is a liability of misdemeanor on the part of a debtor late with payment. In practice, the debtor shall be liable only if the creditor decides to file a complaint, because none of the authorities will officially press charges in case of violations. This is another unusual provision, that the debtor must pay a fine to the state because he is late with the fulfilment of the monetary obligation related to a private legal affair. The biggest paradox is that in the enforcement proceedings, the claims that the Republic of Serbia has are of a priority order of settlement in relation to other creditors, and even if the creditor files a complaint to a misdemeanor court and the court determines that there is indeed a misdemeanor, the state will charge the fine first, followed by the creditor, hence the creditor would then have even less chance to collect the debt. For that reason, the legislator must seriously consider amending these provisions.
Conclusion
The legislator has made a significant step in preventing delays in the debt payments, but there is still much to (re)consider for the Law to reach the level of regulations applied in the European Union. For that reason, the legislator must constantly work on improving such issues and keep up with the EU law, since the only way to ensure that the economy remains stable and healthy is for debtors to pay their debts on time.
[1] “Official Gazette of the RS”, No. 119/2012, 68/2015, 113/2017 and 91/2019
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