Edmonds Judd

Business Payment Practices Act 2023

A steer for debtors and creditors

The continued rise of input costs, finance costs, labour shortages, ongoing material shortages and compliance costs are forcing many businesses to tighten their belts. In this article we give some advice to assist both creditors and debtors with managing their business relationships and financial accounts when it comes to unpaid invoices.

Protecting your business from outstanding invoices

Terms of trade and contractual terms: Having robust terms of trade is one of the best ways your business can protect itself from bad debtors. Including clauses for default interest and the recovery of your legal costs means that you are less likely to be left out of pocket if you need to take action to recover an outstanding debt. You should also consider whether your business should take security over your customer’s personal property or land assets, or a guarantee (backed up by a security); these are highly recommended where substantial amounts are involved, or where a customer has few assets and/or extensive liabilities.

Invoicing discipline: Nobody likes getting one large invoice at the end of a contract; it also presents a risk in terms of cashflow if your debtor cannot pay you in full and on time.

Your business should regularly review its billing practices to improve the way it invoices. Do you require deposits? Can you issue interim invoices? Should you seek payment in advance and, if so, in full or in part? Are you invoicing in accordance with your industry’s best practice? And for businesses in the construction sector, are you issuing valid payment claims to take advantage of the construction contracts regime?

Accounting software is a lifesaver for businesses; it enables easy tracking of outstanding invoices and cashflow. Invoices and payments should be tracked promptly to give an accurate projection of cashflow and ensure no payments slip through the cracks. Ensuring your staff are trained in how to use your accounting software, and to report on cashflow, is just as important.

If you aren’t motivated to invoice work or chase payment in a timely manner, the chances are your customer won’t be motivated to pay on time. For creditors, invoicing your work promptly can assist in resolving issues before they arise. The longer you wait to invoice your work, the more likely your customer is to complain about receiving the invoice and it’s less likely they will have funds ready to pay the invoice by the due date.

Coordinating cashflow: Your business will rely on prompt payment from your customers to pay your own suppliers. If your business can’t afford to pay your suppliers’ invoices on time then it risks getting stung with penalties and default interest.

You should coordinate your business’s income and expenditure to reduce the risk of default. If, for example, your business has outgoing payments due on the 20th of each month then it would be sensible to require your invoices to be paid by the 15th of the month, or a certain number of days after the invoice is issued. You should also consider building up a business contingency fund to act as a buffer if your incoming invoices aren’t paid on time.

Why pay invoices on time?

Credit ratings: Missing or defaulting on invoice payments will adversely impact the credit score of your business and therefore its ability to obtain finance. Some lenders look back through years of financial reports to assess your ability to pay, so even if you don’t think you’ll need a good credit rating now, it is important to stay on top of your outstanding bills.

Business reputation: Businesses pride themselves on their reputation among customers – for quality work and/or friendly customer service. But they also need to have a good reputation in their industry. Consistently failing to pay bills on time may cause suppliers to stop working with you and, depending on your industry, word of mouth can travel fast.

Reputation is also important for creditors. If you have a reputation for litigiousness rather than acting in a reasonable manner, businesses may be hesitant to work with you. On the other side of the coin, if your business has a reputation for not chasing outstanding debts, then your customers may try to take advantage of you.

Compounding debts: The failure of many businesses can be attributable to having compounding debt – that is, invoices going unpaid for months while more invoices to be paid pile up. Having the discipline to be on top of debt by paying invoices regularly can help to keep your finances manageable and preserve your business relationships.

Disputes are costly: There is a range of legal methods available to creditors to enforce outstanding debts, including obtaining or enforcing a security interest over property, issuing a statutory demand or bankruptcy notice, or starting court proceedings (including liquidator appointments) against a debtor. Debt collection agencies might also be engaged.

Some methods (notably caveats and security interests) can have a detrimental effect on a debtor’s business operations. They can be a great bargaining chip for creditors, but potentially disastrous for debtors if enforcement of those interests is pursued. As well, a creditor’s terms of trade will often state that debt recovery costs will be borne by the debtor, so it is very much in the debtor’s interests to pay invoices on time to avoid costly legal disputes and disruption.

Be upfront: If you aren’t sure how much a job is going to cost, it is wise to ask for an estimate or quote before you enter into an agreement. If costs escalate during a contract (either from your supplier or for your customer) or you find yourself cash-strapped, it is generally best to talk with them early on about that too.

Negotiating a compromise with an element of commercial nous, such as a payment plan, rather than forcing disruptive cancellations or costly court proceedings is often a better outcome for both sides.

Possible reform

In 2023, the Business Payment Practices Act 2023 was passed that would have required large public and private entities to publish information about how long it takes them to pay their invoices and their payment terms.

The new government, however, has repealed the Act and will replace it with a voluntary code to ensure SMEs are paid in a timely manner. While we are unlikely to see the effects of these changes for some months, the impact of large market players paying invoices on significantly extended payment terms appears to be front of mind for politicians. We are also likely to see improvements in the way public service entities pay their invoices, resulting in quicker payment times for suppliers. Businesses should be mindful of possible changes being implemented in the future.

Need a hand?

If you find yourself being pulled into a dispute or are unsure how to protect your business then it is always best to talk with us, whether it be in relation to developing or reviewing contractual documents, or with initiating or defending a claim for payment of money. Your accountant or financial planner will also be able to help with any cashflow issues or with advising how best to manage your finances.

 

DISCLAIMER: All the information published in Fineprint is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Fineprint may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Business briefs

Cartel conduct: New Zealand’s first ever criminal cartel prosecution

The Commerce Commission recently filed criminal charges against two construction companies and their directors for alleged bid-rigging of publicly funded construction contracts. This is New Zealand’s first ever criminal prosecution for alleged cartel conduct under the Commerce Act 1986.

 

Bid-rigging, or collusive tendering, occurs where some or all the bidders collude to pre-determine who will win the bid or tender. This is a form of cartel conduct that is prohibited by the Act.

 

The case is currently before the court so information is limited but, if found guilty, the companies and their directors could face serious penalties. Each company could be fined up to $10 million, three times their commercial gain from the cartel conduct or 10% of their turnover per year per breach. Each director could be imprisoned for up to seven years and/or fined up to $500,000.

 

The Commission’s willingness to bring criminal proceedings for cartel conduct is a warning for all businesses to understand their obligations under the Act and have adequate processes to avoid engaging in cartel conduct.

 

New privacy rules for biometrics

The Office of the Privacy Commissioner (OPC) has announced it will release a draft policy code early this year regulating the collection and use of biometric information. The code will have direct implications for any businesses dealing with biometric information.

 

Biometric information is any information about a person’s biological or behavioural characteristics, such as fingerprints, face, voice or eyes. It is increasingly common for businesses to collect and use biometric information to verify people’s identities online, enhance retail security, control access to devices or physical spaces, or to monitor attendance at a site or a work place.

 

While the use of biometrics has significant benefits for businesses, it also increases the risks of profiling, discrimination, bias, and lack of transparency and control to individuals.

 

The OPC has proposed three categories of rules that businesses must comply with when collecting and using biometric information. These are:

  1. Proportionality assessment: Businesses must undertake a proportionality assessment to ensure that the reasons for collecting biometric information outweigh the risk of privacy intrusion
  2. Transparency and notification: Businesses must be open and transparent with individuals and the public about the collection and use of their biometric information, and
  3. Purpose limitations: The collection and use of biometric information will be restricted for certain purposes.

 

The public will have an opportunity to provide feedback on the code before it is implemented.

 

New reporting obligations for large businesses

The Business Payment Practices Act 2023 will come into effect on 25 May 2024. It will require large businesses to publicly report information on their payment practices to the Business Payment Practices Register.

 

The legislation applies to businesses with more than $33 million in annual revenue and $10 million in third party expenditure. The information that must be reported on includes:

 

  • The average time to pay supplier invoices
  • The percentage of invoices paid in full within the required timeframe, and
  • A description of the business’s standard payment terms (if any).

 

If a business fails to comply with its reporting obligations, it could be fined up to $9,000. If a business intentionally provides false or misleading information, it could be fined up to $500,000.  The Act is designed to address payment delays that can have significant impacts on the cash flow for New Zealand’s small and medium-sized businesses.

 

If you would like more information or advice on any of the above topics, please feel free to contact us.

 

 

DISCLAIMER: All the information published in Commercial eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Commercial eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650