The European Parliament has approved a proposal for a new Directive regulating the late payment of commercial debts.

The Directive, which will replace the existing Late Payments Directive of 2000, calls for a "decisive shift to a culture of prompt payment" within the EU.

The Directive aims to give further protection and confidence to creditors providing goods and services - in particular to small and medium-sized enterprises who are generally more affected by the liquidity problems brought on by the late payment of debts.

The new Directive aims to reverse the trend of late payment by making late payment less attractive to debtors. The Directive introduces specific provisions on payment periods, fixed penalties, and interest rates.

Where payment has not been received within the relevant payment period, the Directive will ensure that the creditor is entitled to receive interest for late payment from the debtor, without the need of issuing a reminder.

Late-paying debtors will also be required to pay fixed fees to cover the creditor's costs of recovery. While this will be set at a minimum of €40, it may ultimately be more in order to cover all the reasonable recovery costs incurred by the creditor.

Contracting commercial undertakings will be subject to maximum payment periods of 30 calendar days, unless expressly agreed in the contract - in which case, the maximum payment period will be 60 days.

The Directive does provide limited scope for variation. Both the interest rate and the relevant payment periods may be extended - however, only where this is expressly agreed in the contract, and is not grossly unfair to the creditor. Gross unfairness to the creditor will be determined with reference to, for example, whether the contractual term represents a gross deviation from good commercial practice, contrary to good faith and fair dealing. Moreover, certain terms, such as the exclusion of interest or compensation for recovery costs, will be presumed to be grossly unfair to the creditor.

The Directive notes that public authorities generally occupy a stronger position in commercial contracts. As such, in transactions where a public body is the debtor, the payment period cannot exceed 30 days, unless expressly agreed in writing and objectively justified in light of the transaction - in which case, the period can be extended to a maximum of 60 days. Member States will also have the option to provide a 60 day timeframe as standard for public entities providing healthcare and public bodies which carry out economic activities of a commercial nature.

The Directive will likely be adopted in the coming weeks, with the Commission noting that Member States will have until early 2013 to implement its provisions.

The Directive and the European Parliament's Amendments can be accessed by clicking here.