In brief - Your actions will depend on whether you acknowledge
or dispute the debt
If you are contacted by a debt collector, you should be frank
about what you plan to do. If you dispute the debt, you should get
legal advice as quickly as possible.
Debt collectors don't go away if you ignore them
An approach from a debt collector can come in a number of
different forms - a telephone call, a letter of demand, attendance
at your home or place of business, a statement of claim or summons,
a creditor's statutory demand if your business is a Pty Ltd or
a bankruptcy notice if you are a sole trader.
The most important thing to do when you receive an approach from
a debt collector is not to ignore it.
Avoiding an approach by a debt collector will inevitably result
in an escalation by the debt collector. You should encourage
contact with the debt collector and be transparent about the action
you intend to take.
Do you acknowledge that the debt is due and owing?
If you acknowledge that the debt is due and owing, the first
approach can usually be dealt with by contacting the debt collector
and agreeing to enter into a payment plan with them.
If you dispute the debt, then it is important to obtain legal
advice as quickly as possible. Depending on the size of the debt, a
commercial settlement can usually be obtained in most cases.
It is imperative that you obtain legal advice immediately if you
receive a bankruptcy notice, a creditor's statutory demand or a
statement of claim/summons.
Bankruptcy notices, creditor's statutory demands and
statements of claim
If you have been served with a bankruptcy notice or
creditor's statutory demand, you have only 21 days in which to
respond. A failure to respond can result in you being declared
bankrupt or your company being placed into liquidation.
If you have been served with a statement of claim you usually
have 28 days to file a defence. A failure to file a defence will
result in default judgment being made against you or your
Make sure you update your company records with ASIC
If your company is a proprietary limited company, you should
also ensure that the company details held by the Australian
Securities and Investments Commission (ASIC) are correct and up to
The law requires that a creditor's statutory demand is
served on a company at their registered office. Most companies list
their accountant as their registered office. However, they rarely
update their ASIC record when they change accountants.
I have witnessed a number of companies that have been placed
into liquidation for a very small debt, only because they failed to
keep their ASIC record up to date and therefore were not aware of
the debt or the court proceedings. This most often happens on the
back of a tax debt or workers compensation insurer audit.
Once a company has been placed into liquidation, it is very
difficult and costly to reverse.
Investigating the financial health of your business
An approach from a debt collector should also prompt you to look
at the health of your business, as it can be an indicator that
things are not travelling as well as they should be. The main
complaint amongst insolvency practitioners continues to be that if
the business owner had sought professional advice earlier, there
would have been a greater chance of turning the business
As a business owner, the first thing you should do to
investigate the financial health of your business is visit your
accountant. Providing your financial books are up to date, your
accountant should be able to give you a snapshot of how your
business is faring. They can also refer you to other professionals
if it appears that you need legal assistance or restructuring
Six signs that your business could be in trouble
The main indicators that your business may be in trouble
Inability to meet employee superannuation contributions
Significantly aged creditors, beyond 120 days
A general lack of liquidity or available cash
Significant and recurring losses
Inability to meet taxation obligations
Receipt of letters of demand, statutory demands or court
On a practical level, if you are tempted to use your BAS
obligations as if they represent a loan, your business is likely to
be in trouble.
Directors can be personally liable for debts incurred during
It is important to note that not all of these indicators need to
be present to cause you to investigate the financial health of your
business. In fact, if all of these indicators are present, it would
indicate that the business is trading whilst insolvent.
Engaging in insolvent trading can have very significant impacts
for a director of a company. If a company engages in insolvent
trading and is later placed into liquidation, the director can be
held personally liable for all debts incurred whilst the company
traded insolvently. In addition, a director can be held liable for
unpaid PAYG and superannuation guarantee payments.
This Update highlights two recent cases that considered circumstances where liens could take priority over a registered security interest.
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