In brief - Legal proceedings to recover a debt should be seen
as a last resort
In an age where a significant proportion of small and medium
businesses are dealing with issues of cash flow, global economic
uncertainty and a lack of demand, non-payment of debts can destroy
a business. It is important to know the legal process that you can
follow if someone owes you money.
You don't want to start legal action if there is any way to
It is often cheaper and more practical to try to negotiate a
payment plan under which the debt can be paid off in instalments,
rather than to bring legal proceedings. This can also be the best
method to maintain what in the long run may be a profitable trading
partner, customer, or even friend.
Interest and any legal costs incurred to date are often included
in repayment agreements, so that the creditor will eventually be
put back into the position they would have been in if the debt had
been paid when it was due.
Written evidence that the debt exists
The paper trail is significant in the eyes of the law. So before
you do anything, check to see if you have written evidence - a
contract, an invoice, correspondence, a scrawled note on the back
of a napkin - anything that suggests an obligation on the part of
someone to pay you in return for the provision of goods or
If you don't have anything in writing, send a friendly email
to the debtor so that they might reply acknowledging that the debt
Armed with your documents but prior to commencing proceedings,
it is strongly advisable to have your lawyer send a letter of
demand to the debtor, stating how much is owed and giving them a
time in which to respond. Using a lawyer will show the debtor you
are serious about getting your money back.
Beginning legal proceedings to recover the debt
If the letter of demand is unsuccessful, the next step would be
to be to dive head-first into proceedings. Please check for rocks
before this though; proceedings often involve significant legal
costs and filing fees. A statement of claim which sets out the
elements of the debt will need to be prepared, filed and
The debtor can then, if it chooses to do so, file a defence. If
a defence is filed, the matter will then follow a particular
process towards a hearing. This will involve the preparation and
filing of evidence, at least one pre-trial conference and probable
attempts to settle the matter. Hopefully the 28 days pass without
sign of any defence and you can proceed to the next step: default
To obtain default judgment, a notice of motion needs to be
filed. The preparation of this will again involve legal costs, but
there is no filing fee and it does not have to be served. The
matter is then listed before a Registrar, who gives judgment
usually within a week.
The hard part - enforcement of a judgment
Once you have a judgment against a debtor (either by default or
after a trial), there are a number of enforcement options available
to you, though you should keep in mind the old truism that you
can't squeeze water from a stone. You can get an order from the
Court for a sheriff to seize the debtor's tangible property and
sell it. You can also get a garnishee order which you can serve on
third parties that owe the debtor money so that their debt is
instead payable to you. These can be served on banks or even
Time to bankrupt or liquidate?
Finally, you also have the option of bankrupting the debtor if
they are an individual, or lodging a creditor's petition to
have a company wound up if they are a company – but only
if the debt is for over $2,000.
In these situations, either a trustee or a liquidator may be
appointed over the person's or company's property. The
trustee or liquidator may then sell assets or collect income to pay
back the debt. However, it is very rare for the creditor to get
their money back in full in either of these situations - in fact
they may not receive anything at all.
Negotiation is always preferable to litigation
There are some who might say that things were easier under Roman
law, when a creditor could legally hold as a bond-servant or even
cut to pieces a debtor who did not pay their debts.
Times do change however. As a creditor, you need to understand
the nature of the process so as to balance what may be gained
against what may be lost. It is always better to negotiate if at
all possible and treat legal proceedings to recover a debt as a
The latest amendments arose from ASX concerns that some listed entities had misinterpreted the 2013 updated guidance note.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”