It pays to break the vicious debtor cycle: stringent debtor management is vital
In the hire industry, it is common for hirers to incur significant exposure on customer accounts where credit is extended in circumstances where security is not provided. In a difficult economic climate, ensuring your customers promptly pay for hired goods, or pay at all, can be challenging.
A recent analysis has found that:
62 per cent of bills issued to customers are settled late; and
customers took, on average, 52 days to pay their bills.
The late payment of bills by customers can adversely affect the cash flow of your business and may be an early warning sign that your customer’s business is failing.
In relation to companies, the Australian Securities & Investments Commission has recently released statistics showing that in the 2011/2012 financial year, 10,757 companies were placed into external administration, for example, by appointing an administrator.
In this article, we will explore the options available to your business to recover outstanding debts owed by customers who, for no good reason, have failed to pay.
Who is your customer?
The importance of knowing precisely who your customer is from the outset of your business relationship cannot be understated. Failure to do so can lead to problems in identifying who the real debtor is, and whether the signatory on the account or credit application had the authority to incur the charges.
Your customer is, in most cases, either an individual or a company.
At the very least, you should consider undertaking the following free online searches:
A company and business names search available on ASIC’s website to find out if you have been given a company name or business name, the correct ACN, and if the company has been deregistered or is under external administration.
A business name search using the Australian Business Register to show who owns the business name.
A bankruptcy search, through the Federal Court’s website, to identify whether the person is bankrupt.
Common errors that customers make when filling out applications are that the customer is incorrectly identified as being a business name when, in reality, the business operates through a company, or vice versa.
It is critical that you maintain up to date records of your customer so that any letters of demand or Court process that you may need to issue against your customer can be sent to your customer’s current address. This will ensure that delays in non-delivery of correspondence are avoided and will circumvent the need to obtain paid searches to identify your customer’s current address.
Also, bank and business reference checks should be conducted before credit is extended to a new customer or when an existing customer requests an increase to a credit limit.
Letter of demand
Your attempts to contact your customer to chase up payment of your invoice have not been successful. Your customer neither answers your calls nor replies to any of your emails. What do you do now? The key to any recovery action which is taken is that it is taken as quickly as possible to increase the likelihood of receiving payment and to guard against the possibility that your customer’s business may fail in the intervening period or that its assets are dissipated.
As a first step, whether your customer is an individual or a company, you should send a letter of demand. The letter notifies your customer:
How much is owing.
That you intend to commence recovery action if the amount is not repaid within a short period, such as 7 days, and that additional costs and interest may be incurred if that happens.
Often, upon receipt of the letter of demand, your customer will make payment of its debt. If this does not occur, the letter is still useful as it can be relied upon in any recovery proceedings you decide to commence against the customer.
If your customer is a company that owes you at least $2,000, an alternative to a simple letter of demand is to issue a statutory demand to that company.
The purpose of the statutory demand scheme is to provide a quick resolution of the issue of solvency of a company. Accordingly, a statutory demand should not be issued if the debt is disputed by your customer, even if you believe the dispute would ultimately be determined in your favour. Where a debt is disputed, recovery proceedings should be commenced by way of statement of claim filed in a Court with the appropriate monetary jurisdiction to determine the claim.
A statutory demand takes a particular form prescribed by the Corporations Act and Regulations. If the debt demanded is not a judgment debt, it must be accompanied by an affidavit attesting to the belief of the deponent that the debt is due and payable, and that there is no genuine dispute about the debt.
The company has 21 days from the date of service to comply with the statutory demand. Compliance requires the company to either pay the amount demanded or reach agreement to pay by instalments. Alternatively, the company may apply to the Supreme or Federal Court to set aside the statutory demand on the basis that there is a genuine dispute as to the existence or amount of the debt, or that the company has an offsetting claim.
In the absence of compliance with the statutory demand within 21 days, the company is deemed to be insolvent unless an application to set aside has been filed and served.
An application to wind up the company may then be made to the Supreme or Federal Court on the ground that the company failed to comply with the statutory demand and is deemed to be insolvent.
The advantage of issuing a statutory demand is that it places pressure on the company to either pay the amount claimed or to go to the expense of applying to set aside the statutory demand within 21 days of service. Also, there is no need to have first taken recovery proceedings to obtain a judgment against the company for the amount owed. This avoids the delay and legal costs associated with such proceedings (as to which, see below). There is also a risk that any assets the company has will be dissipated during the currency of any recovery proceedings taken against it.
However, it must be remembered that the Courts apply a low threshold of what constitutes a “genuine” dispute and a statutory demand will usually be set aside if the dispute is merely ‘plausible’. If the statutory demand is set aside on this basis, a costs order will probably be made against you in favour of the debtor company. Even if the debtor company fails to have the demand set aside, the process of recovery will have been considerably delayed and you will have incurred material additional legal costs for which you might never be reimbursed.
Recovery proceedings should be commenced promptly if the letter of demand is not answered.
For a customer who is either an individual or a company, you will need to file a statement of claim in a Court in your State or Territory with the appropriate monetary jurisdiction to determine the claim.
If a defence is not filed within the time provided in the jurisdiction in which the proceedings are commenced, you may apply to the Court for default judgment against your customer. This will require that you file an application with supporting evidence to show that the debt remains outstanding.
If a defence is filed which does not disclose any proper legal (as opposed to factual) grounds, consideration ought to be given to applying to strike out the defence and to seek summary judgment. However, if this approach is to be taken, our experience is that the Court will usually provide a defendant with a second chance to amend the defence if there is an arguable defence available.
Once the Court has entered judgment, there are a range of options available to you to enforce that judgment. Some thought should be given to the form of enforcement that will be suitable having regard to your customer’s particular circumstances and the known asset position of your customer. If credible information is available to you which suggests that your customer does not have the capacity or assets to meet any judgment ordered in your favour, there is a real risk that any legal costs you incur as a result of any enforcement action taken may also become irrecoverable. On the other hand, if your customer is still trading, the prospects of recovery are increased.
The common forms of enforcement that are available include:
Commencing bankruptcy proceedings where your customer is an individual and the judgment debt is $5,000 or more. The process involves requesting the Insolvency and Trustee Service Australia to issue a bankruptcy notice. If the customer fails to comply with the bankruptcy notice within 21 days from the date of service, this is an act of bankruptcy that you may rely upon as the basis to seek a sequestration (bankruptcy) order against that person from the Federal Court or the Federal Magistrates Court. If a sequestration order is made, a trustee is appointed to take control of the bankrupt’s property, sell it, and pay dividends to the bankrupt’s creditors. If the application is not contested, a trustee will usually be appointed by the Court within 4 to 6 weeks of the filing of the application.
Commencing proceedings to wind up a customer that is a company where the debt is $2,000 or more. The basis of this application is usually that a statutory demand requiring payment of a judgment debt has not been complied with (see the ‘Statutory demands’ section above). An application is filed with the Supreme Court or Federal Court seeking an order to wind up the company and to have a liquidator appointed. The orders to wind up the company and have a liquidator appointed may be obtained urgently if, for example, there is evidence available that the company is taking steps to dispose of its assets to avoid obligations owed to its creditors. If the application is not urgent, and it is not contested, the Court will determine the application, often within 4 to 6 weeks of the filing of the application. A liquidator will then take control of the debtor’s assets, sell them, and distribute the proceeds amongst the creditors.
Applying for a garnishee order, such as in relation to your customer’s bank account. This is a Court order that requires your customer’s bank to pay any funds held in the customer’s bank account to you in satisfaction of the judgment debt. Such orders can be effective if they are obtained quickly. However, their success is uncertain given that there is no guarantee that a customer retains any funds in the garnisheed bank account.
Applying to have the Sheriff attend your customer’s premises to seize goods to sell them to satisfy the payment of your debt. The threat of the Sheriff’s attendance at your customer’s residential or business premises serves to place added pressure on the customer to make arrangements with you to satisfy the debt which is owed. A disadvantage with this process is that execution can take some time and a third party may claim ownership in respect of any property identified by the Sheriff as belonging to your customer.
A range of factors should be considered when assessing the merits of any enforcement steps that are available against a delinquent customer. In our view, an overriding factor that should always be considered is a comparison of the amount of the judgment, the costs associated with enforcement of the judgment, and the likelihood of recovery. After performing this balancing exercise, it may be apparent that incurring costs to enforce a judgment is not a commercially viable option for your business.
That said, it is our experience that debtors often pay their debts or make arrangements to pay by instalments at the commencement of enforcement action, upon realising that the creditor is serious about collecting what is owed and the possibly dire consequences of doing nothing.
In the current economic climate, stringent debtor management is vital to the continued viability of any business.
It is critical that debts due from customers are chased promptly, particularly were little or no security has been provided by the customer in respect of the debt. The risks of delay commonly include losing contact with the customer, assets being dissipated, the customer ceasing to run its business, or the customer becoming insolvent.
Taking early decisive steps will guard against the risks of not being able to recover money due from customers for hired goods supplied to them. Whether by way of the commencement of recovery proceedings or the issue of a statutory demand, it is important that your business apply its debt recovery procedures consistently and rigorously.
 Dun & Bradstreet Trade Payments Analysis: December quarter 2012.
 Australian Securities & Investments Commission Annual Insolvency Statistics released on 5 March 2013.
 Using the Federal Law Search function.
Author: Gavin Stuart & Elias Yamine