Regardless of the amount of background checks you perform, if you own a business, there are inevitably debt recovery issues with clients. Naturally, when debtors refuse to pay, this can harm your business' profitability and cash flow.
It is important for business stakeholders and owners, particularly in this current economic environment, to have a high-level understanding of the debt collection processes and options available to them for debt recovery.
Debt recovery laws and procedures change over time. This is a basic summary to help you with understanding the key elements and an overview of the legal processes in Victoria. The debt recovery process in Queensland and New South Wales are similar, but do vary.
What Business Debt Can I Recover?
Creditors can commence proceedings to recover money up to 6 years after the debt first became due and payable. Unfortunately, a lot of businesses prematurely write these debts off, meaning the funds are never recovered. However, in a few simple steps you can secure these old debts that you assumed were lost.
If you have a debt relating to the building industry there are specific debt collection methods such as the Building and Construction Industry Security of Payments Act (SOPA) claims. Read more on SOPA here.
Therefore, it is advised that legal advice is sought before writing off any aged receivables. You may still be able to recoup them. We can also give you advice on ways to protect your business from bad debts.
The Commercial Debt Recovery Process
Debt collection can seem simple, but the courts have strict rules that must be adhered to and expert help in navigating these can make a real difference to the amount you recover and the timeframes.
For debts over $5,000 a lawyer should be engaged to collect the debt. An experienced debt collection lawyer can provide you with concise legal advice and successfully negotiate and draft settlement deeds or payment arrangements.
Claims, and defences, need to be applied for in the right courts and drafted correctly from the outset.
Many of the steps taken from here will depend on your circumstances and available options, which your lawyer will help you navigate.
There are however some common procedures which you can anticipate will occur during your debt recovery matter. These include the following:
Pre-Demand
Before pursuing your debt recovery matter, it is important to organise the following documents:
- Copies of any quotes issued to the debtor about the goods or services provided, any contract, purchase order, scope of works, invoices, variations and an accurate description of the goods or services
- Copies of any correspondence between you and the debtor (including text messages) that may contain an acknowledgement of the debt by the debtor or, copies of any correspondence between you and the debtor regarding any issues or disputes about the goods or services provided
- A copy of your Credit Application, Trading Terms and/or invoice (as applicable); and
- The debtor's contact details.
Demand
Letter of Demand
While this is not the only way to commence debt recovery proceedings, it is the most common method. The letter of demand is sent to the debtor by your lawyer to attempt to secure repayment and determine the willingness of the debtor to pay you. As this letter is written by your solicitor, it is taken more seriously by the debtor than letters sent by you alone. It sends a strong signal to the debtor of you taking further action and is typically effective in starting a communication between the parties.
In some cases, where the matter is likely to go to court, your lawyer can assist you to use additional processes alongside the letter of demand, to provide a basis for you to recover more substantial legal costs.
A detailed letter of demand (rather than a basic form letter offered by some debt collectors) will also ensure you have covered off everything you need to persuade the debtor to pay, or to move swiftly to court proceedings if needed. A relatively small investment early can make a big difference to how promptly and efficiently you can recover the debt.
Creditor's Statutory Demand for Payment of Debt
If the debtor is another company and there are concerns as to its solvency, the Corporations Act 2001 (Cth) allows you to issue a formal demand called a Creditor's Statutory Demand. A Statutory Demand tests the solvency of the company. It is not a tool that can be used to recover debts.
A Statutory Demand must be issued correctly and satisfy the relevant legal requirements or the court may deem it to be invalid (with the risk of a costs order against you). Engaging a lawyer is important to minimise the risk when using this process. A Statutory Demand is a highly effective motivator as there are dire consequences for not satisfying the demand, as the company could be liquidated.
Once served, the debtor company typically has 21 days to resolve the matter with you. This could be paying the debt and costs or entering into a repayment agreement. As there are specific conditions that must be met to issue a Statutory Demand legal advice is vital.
Legal Proceedings
If at this stage your debtor has still not repaid you, the matter will escalate, and proceedings will commence in the Courts. Your lawyer will help you decide on the most viable option for your case.
Getting the right advice here is crucial, as many issues arise if the legal process is not adhered to correctly. There are different jurisdictions (courts) and procedural rules that need to be carefully considered.
Victorian Magistrates' Court
If the debt owed to you is less than $100,000, you can expect proceedings to take place in the Victorian Magistrate's Court. You can expect to go through the following steps:
- A Complaint is filed and served to the debtor
- The debtor is given a period of 21 days to resolve the matter with you or to serve a Notice of Defence if the debt is disputed
- If neither of these processes are completed by the debtor, your lawyer will help you apply for a default judgment. The default judgment is an order that states that the debtor is liable to pay you the claimed amount in addition to an interests and costs sought by the creditor
- If the matter is defended and an agreement is still not reached, the matter will proceed to mediation and potentially a final hearing.
Often, proceedings do not escalate to these later stages as agreement is typically reached between parties early on. Your lawyer should advise you on the various exit points and opportunities to resolve the claim.
Victorian County Court or Supreme Court
If the amount you are owed is greater than $100,000, your matter will be heard within the County Court or Supreme Court (in Victoria) and you can expect to go through the following steps:
- Proceedings are commenced with a Writ & Statement of Claim
- After being served, the debtor has 10 days to file a Notice of Appearance, and 30 days to file a Notice of Defence
- The parties and/or their legal representatives must agree to a timetable on how the matter will be conducted; and
- Companies are required to be represented by a solicitor according to the Court Rules.
It is important for the Writ and Statement of Claim to be comprehensive as this cannot be altered later easily. It can costly to you if the initial claim is deficient, incorrect or poorly drafted.
Judgment:
After receiving judgment, the debtor will typically have 28 days to pay the ordered amount. Should they fail to do so, enforcement steps can be taken.
These will depend on the financial situation of the debtor. For creditors who are unsure, an application is made to summon the debtor to the Court for an Oral Examination. The debtor will be required to answer questions under oath with supporting documentation to identify their assets and liabilities. This will help you to determine which enforcement option is most suitable.
Enforcement options include:
- Creditor's Statutory Demand for Payment of Debt
- Issue a Warrant for the Seizure & Sale of Property
- Attachment of Debt & Garnishee Orders
In most instances, the creditor will be able to enforce the judgment at any point within the 12-year period after which it was served. It is usually easiest and most effective to enforce the judgment promptly, but sometimes an evasive debtor or those who do not have money to pay may become easier to locate or enforce against after some time has passed and they have re-established themselves.
Settlement Deeds and Payment Arrangements.
The outcome you are seeking is for the debt, interest and costs, to be paid. Most solvent debtors will ultimately want to avoid a judgement being made against them in court. A judgement will appear on their credit rating and can potentially adversely affect their ability to raise finance and avoid other creditors calling in their debts.
Debt recovery lawyers are skilled at using the legal framework to your advantage and negotiating a quick resolution. At PCL Lawyers our litigation lawyers are well experienced in handling debt recovery matters and counter-claims.
Before you write-off bad debts (or have received a letter of demand) seek advice on if and how you can recover your money.
We have an in-depth guide on debt recovery you can download a copy here.
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.
