Collection costs
It often happens that an outstanding invoice or claim is not paid. In order to get the claim paid, the creditor often has to incur costs. These costs of collecting a claim are referred to as extrajudicial collection costs. Reasonable costs or reasonably incurred collection costs must be reimbursed by the liable party.
Extrajudicial Collection Costs (Standardisation) Act
As of 1 July 2012, the rules regarding the recovery of extrajudicial costs (Article 6:96(2)(c) of the Civil Code) have been amended. The standardisation of collection costs for monetary claims is laid down in the Extrajudicial Collection Costs (Standardisation) Act (WIK). The costs must be reasonable and the amount of the costs must be reasonable. These rules cannot be deviated from when it comes to consumers. An advantage of this new extrajudicial costs regulation is that it is easy to calculate how much extrajudicial costs the creditor can claim from the debtor on top of the principal amount.
What are extrajudicial costs?
The term “extrajudicial costs” must be interpreted broadly, so that administrative costs, intake costs or registration costs also fall under the rules of the Extrajudicial Collection Costs (Standards) Act and are not eligible for separate reimbursement. The regulation for statutory extrajudicial costs only applies to claims arising from agreements to pay a sum of money. The extrajudicial costs regulation does not apply to claims for damages, for example.
When are collection costs incurred?
When companies enter into agreements with each other, they are free to make different arrangements. For example, companies are free to agree on a payment term between themselves. This term must in any case be considered reasonable. If the creditor’s outstanding invoice does not specify a payment term, the statutory term of thirty days applies. In the case of commercial claims, compensation for extrajudicial collection costs can be charged immediately once the payment term for the claim has expired. However, companies are required by law to send a reminder.
When can I charge a customer collection costs?
You may charge collection costs as soon as a customer is in default. In other words: if they do not pay within the agreed period and you have first sent them a written reminder. For consumers, such a reminder is mandatory and you must send a payment reminder with a minimum period of 14 days. Only then may you demand collection costs. For business customers, this reminder is not always necessary and/or does not necessarily have to be 14 days, unless this has been agreed contractually. If no agreements have been made about the amount of the collection costs, these will be calculated on the basis of the scale in the Extrajudicial Collection Costs (Standards) Act (WIK).
It is wise to include a collection clause in your general terms and conditions as standard. This will strengthen your legal position and prevent disputes about the amount and admissibility of costs in the event of non-payment.
Business to business
When companies enter into agreements with each other, they retain the freedom to make different arrangements. In the case of business claims, the collection costs can be charged immediately as soon as the payment term of the claim has expired. Companies are therefore not legally required to send a reminder. Companies are also free to agree on a payment term between themselves. This term must in any case be considered reasonable. If the creditor’s invoice does not specify a payment term, the statutory term of thirty days applies.
How are collection costs calculated?
The amount of the collection costs is determined on the basis of a percentage of the principal amount of the claim or outstanding invoice. As the principal amount of the claim increases, the percentage decreases incrementally. There is also a minimum and maximum amount. The amount is calculated according to the scale below, as standardised in the Extrajudicial Collection Costs (Standardisation) Act:
- 15% of the principal amount of the claim on the first £2,500, with a minimum of £40;
- 10% of the principal amount of the claim on the next £2,500;
- 5% of the principal amount of the claim on the next €5,000;
- 1% of the principal amount of the claim on the next €190,000;
- 0.5% on the excess of the principal amount, with a maximum of €6,775.
According to the Extrajudicial Collection Costs (Standards) Act, the extrajudicial costs or statutory collection costs amount to a minimum of €40. The maximum collection costs may be €6,775. Whether VAT may be charged on the collection costs depends on whether the creditor is subject to VAT.
The following creditors are not liable for VAT, which means that VAT may be charged on collection costs:
– landlords
– educational institutions
– banks
– insurance companies
– medical professions
– the government
Calculating collection costs: calculation example
If the principal amount of the claim is €11,000, the creditor may charge extrajudicial collection costs as follows:
On the first €2,500 15% (minimum €40) €2,500.00 €375.00
On the next €2,500 10%; €2,500.00 €250.00
On the next €5,000 5% €500.00 €250.00
On the next €190,000 1% €1,000.00 €10.00
Total €885.00
More than one claim against a debtor?
If a company has multiple claims against the same (private) customer, the “addition rule” applies. The creditor or a debt collection agency may not charge collection costs separately for each claim, but must calculate the costs over the total claim or the full invoice amount.
Regulations on collection costs for consumers
Before a company may charge collection costs to a consumer, a number of formal requirements must be met. A reminder must be sent after the consumer has defaulted. In most cases, this means that a reminder must be sent after the agreed payment term has expired.
If no payment deadline has been agreed, a first reminder must be sent to establish “default”. In other words, in cases where a payment deadline has been agreed, at least one reminder must be sent before collection costs are due. In cases where no final payment deadline has been agreed, at least two reminders must be sent before collection costs can be claimed.
The (final) reminder must include the following:
• a statement that the consumer or debtor has 14 days to pay without incurring collection costs;
• the exact amount of collection costs that will be due if payment is not made within 14 days (obviously, no more than the legally permitted maximum collection costs may be charged);
• if a lower amount is requested, the statutory maximum must also be stated;
• if the company in question cannot offset turnover tax, the costs in the above table may be increased by VAT; this must then be explicitly stated in the letter.
These rules also apply before a private individual can charge collection costs to another private individual. If the procedural requirements have been met and the 14-day payment term in the final reminder has expired without payment being made, the collection costs are due in any case. In this case, a debtor is obliged to pay collection costs.
Other costs in addition to collection costs
In addition to claiming collection costs, the creditor may also charge the debtor interest. The amount of these other costs is stated on the reminder. A creditor or collection agency may not charge any other costs. A debtor or the liable party is obliged to pay the statutory interest if the payment term is exceeded.
Judicial award of collection costs
In its ruling of 10 July 2015, the Supreme Court ruled on the award of extrajudicial collection costs by the court. In this judgment, the Supreme Court considered that if a debtor has paid the principal amount owed late and collection costs are already due, the extrajudicial collection costs are paid first in that situation. The creditor or collection agency then has the advantage that interest on the principal amount can continue to be claimed.
The Supreme Court also ruled on extrajudicial collection costs in business-to-business transactions. As mentioned earlier, companies are authorised to deviate from the statutory rules, for example through general terms and conditions. However, the court has the power to moderate these often higher collection costs to the amount specified in the law.
In the aforementioned judgment, the Supreme Court indicated that it had considered that this power of moderation does not exist if the creditor claims – and, in the event of a dispute, demonstrates – that the costs incurred are higher than the amount specified by law.
Ask our solicitors for advice without obligation
With the right legal assistance, you are in a stronger position. Do you have questions about unpaid claims or would you like more information about extrajudicial collection costs? Please feel free to contact one of the solicitors at Fruytier Lawyers in Business.
Authors: Employment law solicitors Mignon de Vries and Myrddin van Westendorp