Compliance and new regulations on payment gridlock | In Principle

New regulations on payment gridlock entered into force on 1 January 2020, via an amendment to the Act Combatting Excessive Delays in Commercial Transactions of 8 March 2013, the Civil Procedure Code, and the Unfair Competition Act. How will the new rules affect compliance in companies?

Regulations combatting excessive delays in payment have been in force in Poland since 2013, implementing the EU’s Late Payment Directive (2011/7/EU), which was intended to reduce payment gridlock in the EU. But in Poland these measures proved insufficient. The new regulations, patterned inter alia on Dutch and French solutions, should raise the effectiveness of the regulations using additional instruments, such as administrative fines imposed by the president of the Office of Competition and Consumer Protection (UOKiK) and reporting on payment terms applied by companies. They should also strengthen the position of creditors in the SME sector, who most often suffer the negative consequences of payment gridlock.

A new look at payment terms

The basic payment term in B2B commercial transactions is 60 days from delivery of an invoice or bill to the debtor. Previously, the regulations provided for the possibility of establishing another payment term by contract (generally longer), if it was not grossly unfair to the creditor. In practice, longer payment terms were often set in dealings between businesses, sometimes 180 days.

The new rules provide for different payment terms depending on the status of the parties. Nothing has changed in symmetrical transactions, where the parties are businesses of the same status (transactions between large enterprises, or between SMEs), or in asymmetrical transactions where the creditor is a large enterprise and the debtor is an SME. As before, a longer payment term may be agreed in the contract, provided that it is not grossly unfair to the creditor.

A new feature is payment terms in asymmetrical transactions where the creditor is an SME and the debtor is a large enterprise. In such cases, the payment term may not exceed 60 days. Any contractual provision to the contrary is void by operation of law, and a 60-day term applies in place of the invalid provisions.

The payment terms in contracts where the debtor is a public entity have also been reduced (a fixed 30-day term).

A major change is shifting to the debtor the burden of proof on the “gross unfairness” of a payment term longer than 60 days. In the event of a dispute, the debtor must show that the term is not grossly unfair to the creditor, for example because it is customarily applied in the given sector, the period for resale of the product by the debtor is also long, or a longer payment term for partial performance is consistent with the delivery schedule.

What is a “large enterprise”?

To apply the right payment term, it is necessary to determine one’s own status and the status of counterparties (SME vs large enterprise).

The amendment provides that a large enterprise is an enterprise not falling within the category of an SME within the meaning of EU regulations, i.e. Annex I to Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty.

According to the annex, the category of SMEs includes “enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.” In assessing the status of an enterprise, it should be considered whether it has “linked enterprises” or “partner enterprises” (Art. 3 of Annex I). If an enterprise is part of a greater organisational structure comprising partner or linked enterprises (e.g. controlled via the owner of a majority stake of shares), then despite its modest individual dimensions it may be deemed a large enterprise.

It should be stressed that Annex I to the EU regulation defines an SME somewhat differently than Poland’s Business Law. This was intentional on the part of lawmakers.

If a firm classifies itself as a large enterprise, it has additional obligations. Firstly, it must provide a statement to its creditor in a transaction on possession of the status of a large enterprise, upon conclusion of the contract at the latest.

It also has an indirect obligation to exercise due care in verifying the statement of the other party. A large enterprise may not rely on a counterparty’s statement that it also holds the status of a large enterprise. This is designed to eliminate instances where SMEs in transactions with large enterprises submit false statements on their status, under pressure or fearing the loss of a contract.

New rights of creditors

To strengthen the position of creditors, the following provisions have also been introduced:

• Higher compensation for collection costs which may be sought when the payment deadline is not met (before 1 January 2020 it was EUR 40, but now it depends on the amount owed and may be as high as EUR 100)
• The creditor’s right to renounce or terminate the contract if the contractual payment term exceeds 120 days and is grossly unfair to the creditor—this right can also be exercised by a creditor that is a large enterprise
• Higher interest on delay in commercial transactions (11.5% instead of the previous 9.5%.

Reporting requirements

Tax groups and undertakings whose individual revenue exceeds EUR 50 million a year (according to Ministry of Development estimates, there are about 2,600 such entities in Poland) will be required to file annual reports on the application of payment terms in commercial transactions in the preceding calendar year. These reports will be public, and posted on the website of the ministry for economy.

The openness of these reports is intended to reduce the risk of entering into commercial dealings with dishonest firms or those applying excessive payment terms.

UOKiK fines and more…

The president of UOKiK will be entitled to impose administrative fines for “excessive delay” in performing monetary obligations. Excessive delay arises if the amount of indebtedness or late payment exceeds PLN 2 million during the course of three consecutive months (for 2020 and 2021 this threshold has been set at PLN 5 million).

The amount of the fine imposed by UOKiK will depend mainly on the value of the unpaid monetary obligation and the length of the delay. The fine is calculated using a statutory algorithm. Significantly, payment of all outstanding amounts and interest will not result in discontinuance of the proceeding before UOKiK, but only in a reduction of the fine.

To obtain relevant information, UOKiK may conduct an inspection at the registered office of an undertaking, with the support of the Police. Appeals against decisions of UOKiK on excessive delay will not be considered by the Court of Competition and Consumer Protection, as in the case of other UOKiK decisions, but through the administrative courts (complaint to the province administrative court and the Supreme Administrative Court).

Interestingly, a new wrongful act of unfair competition, unjustified prolongation of payment terms, has been added to the Unfair Competition Act. An undertaking injured by such unjustified prolongation may seek relief in court, including an order to cease and desist, to cure the effects of the violation or for redress of loss.

A simplified route has been provided in the Civil Procedure Code for obtaining interim relief securing a claim for payment arising out of a commercial transaction, if the claimant shows that the amount due was not paid within three months after the payment deadline.

Compliance in companies and the new rules

The statutory changes have practical consequences for the corporate compliance function.

Firstly, they require a review of contracts for compliance with the payment terms under the new regulations. In certain instances it may be necessary to shorten payment terms to 60 days or modify the approach to cooperation with an existing customer or supplier. It should be borne in mind, however, that contractual provisions seeking to circumvent mandatorily applicable regulations (e.g. a clause on choice of foreign law, or use of a gratuitous performance in place of monetary consideration) are invalid.

In connection with the obligation to provide a statement on the status of a large enterprise, it may be necessary to include relevant clauses in contracts. A statement on holding the status of a large enterprise should be made in the form in which the commercial transaction is concluded. This does not exclude the use of practical solutions such as including a notation to this effect in order forms or information transmitted by email.

The new regulations require a debtor that is a large enterprise to exercise “due care” in verifying the creditor’s status. This condition should be interpreted reasonably. Depending on the facts, this might mean a request to the counterparty to submit a statement, transmission of a simple questionnaire on the number of staff, level of turnover or balance-sheet total, or a review of financial reports or declarations filed with the statistical office. It does not call for an exhaustive examination of the other party’s enterprise which would require the debtor to commit significant effort or funds.

Sabina Famirska, attorney-at-law, Competition practice, Wardyński & Partners