Debt Recovery – A refresher on managing your debtors
Managing debt is an integral part of any business, but particularly in the current COVID-19 impacted economy. It is important for businesses to understand not only how to manage their debt, but also what options are available for those debtors who simply will not pay up. In this article, we step through the various debt recovery options and when each might be suitable for your circumstances.
We understand that our commercial clients view the management of outstanding debts as an important aspect of their business operations and so we have developed a Debt Recovery Pathway to provide our clients with a cost-effective, convenient and quick way to pursue debts and consider the options available. As a background to the Pathway, this article outlines the usual steps in enforcing payment of an outstanding debt.
Letter of Demand
The first step in any debt recovery process will usually be a formal letter of demand. The purpose of these letters is to clearly and concisely set out:
the basis for the debt (such as an invoice or contractual right to payment);
the amount of the debt; and
a demand for payment within a set period of time.
A letter of demand can be issued by either the creditor itself or otherwise an advisor such as a solicitor, with the latter often carrying more weight.
The letter of demand can be an important and cost-efficient tool to recover an outstanding debt, as it can cause the debtor to take the matter seriously and make payment (or arrange to make payment). Further, even if the debtor does not make payment, the failure to meet a formal demand can be important for any future litigation in demonstrating that the debt remains due and payable and can also be an important factor in claiming the costs of proceedings.
Additionally, by engaging a lawyer early to prepare a letter of demand, even if payment is not made it is good to know early if the debtor raises a significant commercial issue. Resolution of a payment dispute can often be resolved cheaper and more easily if the issues which are preventing payment, such as a claimed set-off or allegation of the provision of defective goods or services, can be ventilated at an early stage.
If you would like to issue a letter of demand, we have this service available on our website.
If the debt is $4,000 or greater, an alternative to a letter of demand is to issue a statutory demand to the debtor (provided the debtor is a company).
Statutory demands can be a powerful tool as a failure by a debtor to comply with the demand creates a presumption of insolvency against the recipient company. However, a statutory demand should never be used if you think there is a ‘genuine dispute’ over the debt (or offsetting claim), even if you think you would likely succeed on any adjudication of the debt. A court will only consider whether there appears to be a genuine dispute at face value, it is not required to determine the merits of that dispute. For this reason, statutory demands are the most effective in situations where a judgment has already been obtained, and the demand is used as an enforcement tool.
The Corporations Act and Regulations prescribe the form and requirements for a statutory demand. If the debt is not a judgment debt, the statutory demand must be accompanied by an affidavit attesting that:
the debt is due and payable; and
there is no genuine dispute about the debt.
From the date of service of the statutory demand, the creditor has 21 days to make payment, failing which the debtor will be deemed insolvent unless it applies to a Court to have the demand set aside.
The advantage of a statutory demand is that it carries more weight than a simple letter of demand. Once served, the debtor is required to either meet the demand or apply to set it aside. Failure to comply with the demand allows the creditor to make an application to the Court to wind up the debtor in insolvency.
However, it is important to remember that the Courts apply a low threshold when determining whether a ‘genuine dispute’ or offset claim exists for the purpose of setting a statutory demand aside. If you serve a statutory demand and the debtor is successful in having it set aside, you will likely be ordered to pay the debtor’s costs and will otherwise have incurred your own costs in making that application. In these circumstances, you must carefully consider the nature of the debt and any reasons for non-payment before deciding whether to issue a statutory demand. Even in the case of judgment debts, it is important to remember that genuine disputes may be raised, such as the case of a judgment under the Security of Payment legislation, which is an interim regime of determination.
Alternative Dispute Resolution
In any debt dispute, there may be benefit in exploring early alternative dispute resolution. Examples of alternative dispute resolution can include negotiation, mediation or arbitration. By engaging in these processes early, the parties have an opportunity to ventilate the issues in dispute to try and achieve an outcome without having to resort to the costly and time consuming process of formal debt recovery proceedings.
In considering whether alternative dispute resolution might be advantageous, it is important to consider the amount of the debt, the likely costs to be involved in any recovery proceedings and the importance of recovering some (if not all) of the amount owing in a timely fashion. Additionally, if a debt is based in contract, it may be a requirement of that agreement that the parties engage in a form of alternative dispute resolution before recovery proceedings can be commenced in court. It may be that in a negotiation or mediation, the parties can reach a settlement which although represents a payment of an amount below that which is owing, avoids the time and cost of recovery proceedings (which is discussed further below).
An advantage of alternative dispute resolution is that it can be tailored to suit the needs of the parties (subject to the requirements of any contract or applicable regime which specifies the method to be used). It can be as informal as a phone call between the parties or a round table negotiation, or it can also be a more formal mediation or arbitration, both of which introduce independent third parties and will often involve the parties’ legal representatives.
Although it appears that we can see light at the end of the COVID-19 tunnel, we encourage our clients to continue to carefully monitor their debtors and take the necessary steps to manage their cash flows in this uncertain market. Alternative dispute resolution plays an important role in balancing the time and legal cost of formally pursuing debts against the benefit of obtaining a quick and easy solution that meets the interests of all parties.
Finally, if a letter of demand is not answered, and if alternative dispute resolution is engaged but not successful, the creditor should promptly consider commencing recovery proceedings in the relevant Court in the State or Territory with appropriate jurisdiction.
Once a claim is filed, the debtor will be required to file and serve a defence within a set period of time, failing which you may be entitled to file for default judgment. Further, if a defence is filed but does not disclose any proper legal basis to dispute the claim, you may be able to apply to strike out the defence and obtain summary judgment.
Alternatively, if a defence is filed with an arguable basis for resisting the claim, the parties will be required to each prepare and serve evidence in support of their respective cases. The court will then be required to determine the claim and enter judgment for either the claimant or debtor.
In our experience, recovery proceedings are lengthy (often between 9 and 12 months between commencement and a hearing as a minimum). Additionally, recovery proceedings will require a filing fee on application (which varies depending on the jurisdiction) in addition to any legal costs you may incur. If the court enters judgment in favour of the debtor, you will likely be required to pay their legal costs.
If you obtain judgment from the court, you will then be entitled to enforce that judgment in the event payment of the judgment debt is not forthcoming. The most common forms of enforcement are:
Issuing a statutory demand (or bankruptcy notice, if the debtor is an individual) and making an application to wind up the company (or filing a creditor’s petition to bankrupt an individual) if the demand is not met;
Applying for a garnishee order, such as in relation to the debtor’s bank account; and
Applying to have the Sheriff attend the debtor’s premises to seize goods to be sold for the purpose of satisfying the debt.
There are advantages and disadvantages for each of the above enforcement options. If you have obtained a judgment debt but are unsure as to how you should enforce that debt, you should contact our office.
The uncertainty of the COVID-19 market should have our commercial clients thinking carefully about how to manage their outstanding debtors. Maintaining liquidity in these difficult times is an important strategic consideration for all businesses, but particularly those in the most COVID-affected sectors. Our Debt Recovery Pathway provides a convenient tool that our clients can take advantage of in a timely and cost-effective manner.
Alternatively, to discuss your debt recovery options with our office, you may contact Robert Kalde, Sharon Levy or Scott Homan to discuss how we can assist.