An unfortunate reality of being in business is those occasions when your bills are not paid on time and you have to engage in a process of debt recovery. This can be a distracting exercise which inevitably diverts time and resources away from your core business activities, not to mention playing havoc with cashflow.
This article provides some practical tips to ensure you maximise recovery of your debts and avoid write-offs by focusing on no-nonsense techniques that can be employed to minimise the likelihood of non-payment.
We address this in three parts, mirroring your relationship with your debtors:
- Entering into the relationship;
- Managing the relationship; and
- Seamless recovery/payment.
- Entering into the relationship
The initial formation of the relationship is, without doubt, where most problems arise in relation to debtors. If you don't get this stage right, you give your debtors a potential "escape route". Good clients, contracts and systems are the key to effective debt recovery and getting the details of the relationship accurate at the outset is important to minimise or alleviate the risk of bad debtors.
Who are you contracting with?
This is the first question you should ask yourself when entering into a new business relationship. The question, while it may seem simple, is sometimes not as straightforward as it seems. The following are some questions you may want to ask yourself:
- Is my business contracting with an individual or company? This impacts on the certainty of enforcement, as different enforcement options apply depending upon whether the debtor is an individual or company. It is important to correctly identify the party to the contract.
- Is the individual or company a trustee of a trust? If so, your contract should make that clear.
- If this is my first dealing with this individual/ business, can I request references from other companies who have conducted business with this person/business? For example, can I ask for the contact details of two other business associates so that I can undergo a reference check process?
Once you have determined the correct identity and status of the debtor, it is advisable to undergo a process of confirming the debtor's solvency prior to reaching final agreement on the relationship.
If the debtor is an individual, you can conduct a national bankruptcy search. Citec Confirm is a useful product in this regard1. Citec is an online database which provides real-time information regarding personal bankruptcy records. For a small fee (approximately $25.00), you are able to conduct a search against the individual in question to ensure that he or she is not an undischarged bankrupt.
If the debtor is a company, you can perform a Company Search on the Australian Securities and Investments Commission (ASIC) website free of charge, however, this does not return significant amounts of information2. Preferably, you should conduct a Company Search via ASIC or Citec Confirm for a small fee, as you will obtain a much more comprehensive look at the company's position.
You can also undertake a free search on the ASIC Insolvency Notices website3, which serves as a comprehensive notice board of company affairs in relation to insolvency (i.e. winding-up applications and deregistration). Further, Dun & Bradstreet4 and Veda Applied Intelligence5 are both credit reporting agencies which will provide you with information regarding the credit status of both individuals and businesses.
These searches are easy to conduct, relatively inexpensive and can provide you with important information that may inform your decision to establish a business relationship with an individual or company and, moreover, potentially save you the time and energy associated with chasing unpaid bills in the long run.
Can you provide proof of the agreed terms and conditions?
When you are negotiating the terms of a business relationship ensure that you are being very clear about what the terms actually are. There are some questions you may want to ask yourself in this process:
- What are the goods and/or services being provided? Are they properly defined in the contract?
- How much is being charged for these goods and/or services? When is payment due - at the end of the project or periodically or at completed stages? Is a deposit required?
- What are the parties' rights (e.g. termination rights) in the event of non-payment?
After these matters have been considered in detail, reduce it to writing!
This does not necessarily need to be a formal, lengthy document, but the terms of the agreement (in some detail) need to be documented. If you have standard terms of contract or a template contract document that you use, have a system in place to retain signed copies of these documents. If you don't have standard terms of contract, you might consider sending an email to your customer confirming your understanding of the agreement and request that they confirm by an email in response that the terms as outlined in your email are agreed.
Not documenting the terms of the agreement can lead to a 'he said, she said' situation which may cause difficulties in debt recovery.
Narrowing the "escape route" by creating a paper trail
Creating a paper trail minimises the potential (significantly) of a debtor having an "escape route". Accordingly, consider having a central place where copies of emails, invoices and file notes of conversations are stored.
Protect yourself even further...
You may want to consider the following options as additional ways of protecting your business:
- Can you request full payment or at least a deposit upfront?
- Can the payment be separated into stages with part-payment to be made upon completion of various stages?
- Can you request a personal guarantee (i.e. have a director of the debtor company personally guarantee the debt or some other valuable consideration)? Also, don't forget that security interests over personal property should be registered on the Personal Property Securities Register6.
- Managing the relationship
Managing your business relationships involves keeping the lines of communication open with your customers or clients. Here are some simple techniques that can be employed to ensure that your client feels 'in the loop' and that their needs are constantly 'front of mind':
- providing your customer or client with regular updates about the project or the provision of goods and/or services and keeping communication open; and
- regularly checking to see if you are within budget and promptly notifying the customer/client if you are going to go over budget.
The benefits of employing those methods are, firstly, increased likelihood of payment because the client is not surprised by the bill and is aware of exactly what work has been done in relation to that bill. Secondly, even if there is a discrepancy or dispute about a bill you have issued, as you have already established a business relationship based on open communication, it is much more likely that you will be able to discuss the issue and come to a resolution.
- Seamless recovery / payment
Be prompt, prompt prompt!
Promptly bill upon completion of work! Customers/clients are always more willing to pay upon the completion of a project or the delivery of goods or services as they are familiar with what you've done for them. Conversely, they are more likely to dispute a bill that arrives well after the work has been completed and they have forgotten what a great job you did.
Also, consider whether you should implement a 'debtor timeline system'. That is, processes whereby, for example, if a bill is overdue by 3 days, you call the debtor, then at the 7 day mark, you make another phone call and re-post the bill, etc. You need to be diligent, and the debtor needs to be aware that you are not just going to 'forget about it'.
Steps to recovery – overview
Debt owed by company
The first step in debt recovery proceedings is, generally, to issue an initial letter of demand. This letter will set out the circumstances under which the debt was incurred and will offer the debtor one final opportunity to pay the debt before you take more serious debt recovery action.
If the debtor is a company, the debt is more than $2,000, and there is no genuine dispute in relation to the debt, then you can issue and serve a Statutory Demand upon the debtor.
Once the Statutory Demand is issued and served, the debtor has 21 days to either:
- pay the debt or make a payment arrangement with you; or
- apply to the court to set aside the Statutory Demand, for example, on the basis that there is a genuine dispute in relation to the debt or there is an offsetting claim.
A failure to comply with a Statutory Demand gives you the ability to initiate liquidation proceedings against the debtor. If successful, these proceedings result in an order being made by the court to appoint a liquidator to take control of and liquidate the assets of the debtor company, then distribute the proceeds amongst unsecured creditors in accordance with the priority rules in the Corporations Act 2001 (Cth).
Alternatively, you can commence proceedings by issuing a Statement of Claim in the appropriate court. Once the proceedings are issued and served, if no defence is filed by the debtor within 28 days of service, you may apply for default judgment. Once default judgment is obtained you are able to enforce that judgment in a variety of ways, including issuing a Statutory Demand (explained above).
Moreover, if an individual has personally guaranteed the company's payment of the debt, you also have the option to pursue the guarantor to seek recovery of the debt.
As a low cost alternative, the Queensland Civil and Administrative Tribunal (QCAT) can determine debt matters up to a monetary value of $25,000. There are similar Tribunals in both New South Wales and Victoria.
Debt owed by individual
As mentioned above, the first step in debt recovery proceedings is, generally, to issue an initial letter of demand. This letter will set out the circumstances under which the debt was incurred and will offer the debtor one final opportunity to pay the debt before you take more serious debt recovery action.
If the debt remains unpaid, your next step is to commence proceedings by issuing a Statement of Claim in the appropriate court. As mentioned above, once the proceedings are issued and served, if no defence is filed by the debtor within 28 days of service, you may apply for default judgment. Once default judgment is obtained you are able to enforce that judgment in a variety of ways, including issuing a Bankruptcy Notice on the judgment debt.
Once a Bankruptcy Notice is served on the debtor, the debtor has 21 days to either:
- pay the debt or make a payment arrangement with you; or
- apply to the court to set aside the Bankruptcy Notice, for example, on the basis that there is a counter-claim or set-off equal to or exceeding the amount claimed in the Bankruptcy Notice.
A failure to comply with a Bankruptcy Notice gives you the ability to commence bankruptcy proceedings by filing a Creditor's Petition with the court. Bankruptcy proceedings are initiated through the issue and service of a Bankruptcy Notice on the individual. However, this option is only available if the debt is a liquidated sum which is more than $5,000, where the debt is payable either immediately or at a certain future time and the "act of bankruptcy" upon which your petition is founded was committed within 6 months before the presentation of the Creditor's Petition. In this situation, the "act of bankruptcy" you would be relying upon is the failure of the debtor to satisfy the Bankruptcy Notice.
If the proceedings are successful, a sequestration order will be made by the court which will make the debtor bankrupt. The former property of the bankrupt then "vests" in the trustee in bankruptcy (note that some property is exempt, for example, personal property or a car under a certain value) and the trustee then has the task of ascertaining and realising the property of the bankrupt and distributing the proceeds of the estate equally among all the creditors.
Holding Redlich can assist creditors with the recovery of their debts through any of these processes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.