Most business operators would agree that their time could be better spent than chasing unpaid accounts. Sustaining an enterprise without a regular cashflow however, is simply not possible. Understanding the basic legal processes involved in recovering debt is fundamental to running a business.
Organisations need a practical, commercial approach to debt recovery that minimises further loss and provides quick, effective solutions so owners and staff can get back to doing what makes their business great. Outsourcing this work to an experienced professional makes good sense.
Debt recovery processes
The process used to recover debt depends on various factors. To avoid throwing good money after bad, an informed decision must be made that will take account of:
- the legal nature of the debtor – whether an individual, sole trader, partnership, company or other structure;
- the amount owed and how long it has been outstanding;
- whether the debt is disputed and, if so, the reason claimed for non-payment;
- the solvency of the debtor and the likelihood of the debtor being able to satisfy a judgement in favour of the creditor;
- whether recourse to personal assets of an individual, sole trader or company director may be available to satisfy a debt.
Debt recovery usually starts with correctly identifying the debtor and its financial status, and considering the above factors to implement a strategic, cost-effective approach.
Where the prospects of receiving full or immediate payment appear bleak, a commercial decision may need to be made for a negotiated outcome that delivers the best-case scenario in light of the circumstances.
Letter of Demand
A well-drafted letter of demand is often the first step in persuading a notoriously slow debtor to pay up. The letter of demand should clearly state the amount owed, what it relates to, and how or where money should be paid.
The letter should threaten legal action (including a claim for the recovery of legal fees) if the debt is not paid by a specified date.
Before drafting the letter of demand, commercial consideration should be given as to whether or not you intend to continue trading with the debtor. If you do, the letter of demand can be more subtle, simply providing a stern reminder that payment is overdue. Conversely, if the working relationship has soured, the letter of demand can be drafted in tougher terms.
Court Proceedings
Issuing court proceedings incurs legal and court filing fees. It is therefore important to ensure:
• the amount due and the likelihood of obtaining judgment warrants the expense involved in pursuing legal action;
• the appropriate processes and court division is used;
• the correct debtor entity is identified;
• all facts are properly set out in the statement of claim; and
• relevant supporting evidence is available.
Generally, the size and nature of the debt determines the division and court in which to file a claim and the processes relevant in conducting the proceedings.
Retaining a lawyer experienced in debt recovery is advisable and will likely avoid costly mistakes by ensuring the most effective course of action is pursued.
Obtaining judgment and enforcement
People tend to believe that once a court has granted judgment in their favour that the debt will be repaid in full. In reality this is usually not the case. From our experience, obtaining a favourable judgment is only half the fight.
Once judgment is obtained that judgment needs to be enforced. There are two categories of enforcement strategies. The first category is court based enforcement processes, such as examining the debtor, having the Sheriff seize the debtor’s assets for sale and garnishing the debtor’s bank accounts. The second category is the insolvency process. Bankruptcy for individual debtors and winding up for companies.
We have mapped the two enforcement categories into visual process flows.
Statutory Demands
The issuing of a statutory demand is the first step in the insolvency enforcement process where the debtor is a company. If you are owed more than $2,000 from a company you should consider serving a statutory demand on the debtor company.
Insolvent trading is prohibited by the Corporations Act 2001 (Cth). The Act enables a creditor to issue a statutory demand on a company that may be presumed insolvent if it fails to respond to it.
Statutory demands must comply with the prescribed format and be correctly served on the debtor company to ensure their validity and avoid potential costs orders being made against a creditor.
Once a valid demand is properly served, a presumption of insolvency arises if, after 21 days the debtor fails to pay the debt or have the statutory demand withdrawn by the creditor or set aside by a court.
Essentially, the statutory demand exerts pressure on a company to take action -whether that be to pay the debt in full, negotiate a payment plan or defend the matter in court. If the demand is ignored the creditor is at liberty to file an application to wind the company up.
Bankruptcy notices
The issuing of a bankruptcy notice is the first step in the insolvency enforcement process where the debtor is a person. If you are owed in excess of $5,000 and the debtor is a person, you should consider applying to have a bankruptcy notice issued to the debtor.
There are strict rules pertaining to what a bankruptcy notice must contain and how it must be served in order to be effective.
Once a valid bankruptcy notice is properly served, a presumption of insolvency arises if, after 21 days the debtor fails to pay the debt or have the bankruptcy notice withdrawn by the creditor or set aside by a court.
Essentially, the bankruptcy notice exerts pressure on a person to take action -whether that be to pay the debt in full, negotiate a payment plan or defend the matter in court. If the bankruptcy notice is ignored the creditor is at liberty to file an application to bankrupt that person.
A business that has not been promptly paid for goods or services is already behind the eight ball. Placing your debt recovery matters in the hands of a legal professional can ensure an approach is taken to minimise further loss and recover the entire debt, and as far as possible, the costs incurred in chasing it.
If you need any assistance contact one of our lawyers at info@icllawyers.com.au or call 02 9138 7800 for a no-obligation discussion and for expert legal advice.