In the current economic climate, businesses may be experiencing greater delays in the collection of outstanding debts and an increased incidence of disputes, genuine or otherwise, in relation to accounts rendered.
This article looks at steps which can be taken to seek recovery of outstanding debts once non-legal avenues have been exhausted.
Upon that point being reached, in essence there are two options which are potentially available. (Leaving aside the more unconventional methods used by members of the underworld community!)
One option is to issue what is known as a Statutory Demand under the provisions of the Corporations Act. In essence, that involves issuing a notice of demand in a form prescribed by the Corporations Act stipulating that payment of an outstanding debt be made within 21 days of service of the Statutory Demand. Such a demand can only be issued in circumstances where the debtor is a company.
The other option, and one more commonly used, is to institute debt recovery legal proceedings in a court, after first giving a notice in accordance with the rules of the relevant court to notify the debtor of the intention to issue legal proceedings. The particular court in which the proceedings will be instituted, and the form of the notice to be given to the debtor prior to the commencement of the legal proceedings, will depend upon the amount and nature of the debt concerned. It is important therefore to take legal advice in relation to such matters.
This article will now look at each of these two options in turn.
The effect of a Statutory Demand is that if the debt the subject of the Statutory Demand is not paid within the 21 day period, or if the debtor has not made an application to the Supreme Court within that period seeking to set aside the Statutory Demand, then the debtor company will be exposed to being wound up by the Supreme Court upon an application for winding up being made by the creditor.
This powerful sanction can certainly be useful in placing pressure on the debtor company to discharge the debt (to the extent that it has the financial capability to do so). However, a Statutory Demand is useful only in certain limited circumstances, principally in the case of a judgment debt or where there is no genuine dispute in relation to the debt. It is generally not difficult for a debtor company to demonstrate (or manufacture) a "genuine" dispute, as, in determining whether or not such a dispute exists, the court will not embark upon more than a superficial investigation of the overall merits of the grounds of dispute. As long as the dispute appears, on its face, to be a real, and not specious, dispute then it will be found to be genuine.
For this reason, Statutory Demands should only be used sparingly as a debt collection tool, namely in circumstances of a judgment debt or a debt which is clearly undisputed.
Due to the limited circumstances in which a Statutory Demand is effective, it is more common for creditors to have resort to conventional debt recovery legal proceedings in seeking to recover outstanding debts.
If the proceedings are not defended or if any grounds of defence relied upon by the debtor are manifestly unsustainable, then default or summary judgment may be obtained against the debtor. This essentially means that the court will award judgment on the papers before it, without the need for a trial.
However more often than not the debtor will put forward arguable grounds of defence, in which case it becomes the role of the court to make a determination as to the facts in dispute and any issues of law in dispute. Such a determination is made by the court after a trial, at which each of the parties put forward their evidence and make submissions in relation to the issues in dispute. Before that point is reached, the matter will be in the court system for a substantial period of time, as various procedural matters are dealt with. This can obviously be a costly process.
Having said that, the statistics show that around 90% of contested matters never get to the trial stage as a settlement is reached before trial. This may be either at an early stage or as late as the eve of trial. A settlement of a contested claim will generally require a compromise by both parties (other than in the most clear cut of cases, which tend to be few and far between).
Many matters settle relatively early on in the piece because the lines communication are opened between the parties, via their lawyers, and the majority of lawyers encourage a commercial approach to the resolution of legal proceedings, rightfully so given the costs and risks of litigation.
If a creditor is fortunate enough to obtain a judgment without the need for a trial, or if the matter goes to trial and the creditor succeeds in its claim and thereby obtains a judgment, that, however, is not the end of the matter.
The next step involves the creditor seeking to enforce payment of the judgment debt via one or more means, including:
- If the debtor is a company, the issue of a Statutory Demand. While it is certainly sensible for a creditor to issue a Statutory Demand in these circumstances, if the debtor company defaults on the Statutory Demand then that leaves the creditor with the option of seeking to wind up the debtor company. This involves substantial additional expense for an uncertain benefit, as if the debtor company is wound up then the creditor is likely to get less, and probably substantially less, than 100 cents in the dollar.
- If the debtor is an individual, a similar process can be invoked via the issue of a bankruptcy notice, leading to the bankruptcy of the debtor if the debt is not discharged. Again, however, that approach is costly and of uncertain benefit.
Other options for the enforcement of the judgment include:
- Obtaining a Warrant of Sale over the property of the debtor, including over real estate or an interest in real estate. This is often the most effective means of enforcing a judgment where the debtor has equity in real estate, as if the debt is ultimately not discharged voluntarily after service of the Warrant of Sale on the debtor, then there can be a forced sale of the property with the net proceeds of sale of the debtor's interest in the property being applied towards payment of the judgment debt.
- The issue of an Investigation/Examination Summons against the debtor. This involves summonsing the debtor to attend court to be examined on oath regarding their financial means and ability to pay the outstanding debt. The debtor will be required to disclose details of their income, expenditure, and general financial position. The court will then, having regarding to that information, put in place a binding instalment repayment scheme.
- Obtaining a Garnishee Order over the income of the debtor. Such an order attaches to the salary or wages of the debtor, that is it comprises an order that the debt owing to the creditor be paid directly from the salary or wages of the debtor until repaid in full. In South Australia, a Garnishee Order can only be made with the consent of the debtor.
The most appropriate mechanism for enforcement of a judgment will depend upon a consideration of all the circumstances involved.
The members of our Commercial Disputes and Insolvency section are expert in assisting creditors in the recovery of outstanding debts and in advising in relation to, and navigating, the various debt recovery and judgment enforcement options available.
We can assist creditors to achieve the best possible outcome in the collection of problem debts.
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.