Debt Recovery Process in Australia
Most debt recovery goes smoothly but sometimes it is possible for things to go downhill. Inevitably, there will be a situation, sooner or later, where a business will not be paid for their work, or at least have a serious amount outstanding for a significant period after an invoice is rendered. In other situations, a person or a company may be sued for an unjustifiable debt that really should not be claimed.
The non-payment could be due to a number of reasons such as unsatisfactory quality of the work or disagreements about the quality of the work, delay or a refusal to pay the invoice without any fault on the part of the business involved.
In a commercial world, things get complicated, problems arise and it is possible for a problem to convert into a dispute that eventually leads to a litigation. This article will outline some proper measures to ensure best debt recovery mechanisms are in place.
Debt Recovery Process to have in place
Before even entering into a business transaction it is prudent to do credit checks and due diligence research to understand or be aware of whom your business is entering into a financial dealing with to hopefully avoid the need for debt recovery in the first place.
If that other party to your business transaction does not show a positive history to be warned before the need for debt recovery even arises in the first place, ‘prevention is better than cure’ as they say.
A written contract at the start of your commercial relationship will best ensure lesser problems down the track. Additionally, the written contract can include a clause that requires the debtor to pay interest if the outstanding amount is not paid on time. Hence, it is rightly said that the prevention is better and much cheaper than the cure.
Proper and timely invoicing procedures also need to be utilised to ensure prompt attention is given by those engaging your services so that attention is given to those payable amounts as soon as the invoice becomes payable.
Putting your Concerns in writing by sending a late payment reminder letter
If a debt arises the initial method of recovering the outstanding amount is to engage in open and direct communication with the debtor. Proper written communication is best because it can be used later as evidence, if the need arises. Often your lawyer can write on your behalf.
This allows you to pursue debt recovery proceedings and to proceed, if necessary, before too much time has passed since the amount become due and payable.
The letter must clearly outline the amount due and payable and brief description of the work for which the invoice is due and payable. This approach helps maintain the relationship between the parties and keeps open the door for future work opportunities. The outstanding invoice should be enclosed for reference.
Issuing a Letter of Demand for debt recovery
If the contact and a friendly reminder to pay the money owed did not work, a letter of demand to the debtor which requires payment of monies owed for the work done within a certain time period or on a particular date is required. The letter should remind the debtor that appropriate legal action will be pursued if the amount remains outstanding after a specified number of days. This legal letter can also stay legal costs will be payable if court action is commenced, as well as other amounts inclusive of penalty interest which would be payable if the debt remains outstanding or if the matter proceeds to court.
A key strategy is to immediately instruct your lawyers to commence recovery proceedings if the debt amount remains payable after the debt is not paid within the period specified by the legal letter of demand. Strategically, debt recovery proceedings should be commenced as soon as possible to maintain the right pressure on the debtor and also to make sure that that the debt recovery process maintains forceful credibility.
Litigation itself should be seen as a final resort, to be commenced only after the other mechanisms have been exhausted. The appropriate court of jurisdiction generally depends on the amount of the debt and the jurisdiction in which the debt arises.
In most occasions legal proceedings will be commenced in a court by lawyers preparing the court documents inclusive of the statement of claim. Your lawyer would also engage a barrister at this time if the debt is for a significant amount and there would be other costs such as court filing fees, again the amount of the court filing fee would be connected to the amount of the debt that has not been paid.
Merely because your debt has been brought to the attention of a court, it does not mean that you will necessarily have the matter determined by a judge. In fact, most matters do settle by the respective parties making offers and normally counteroffers until a settlement arrangement is reached.
Nonetheless, it is possible for an agreed settlement to take place between you and your debtor before the hearing date. There is no absolute rule as to timing of the settlement offers, sometimes they can occur immediately after proceedings are commenced. Other times settlements can be achieved on the doorstep of the Court.
A debtor will either file and service it’s defence otherwise, your lawyer can seek orders for payment of the debt by way of default. Finally, through the Court process a decision can be made in your favour at trial for example.
What are my options after the Court makes a decision in my favour?
If a Court makes Orders for the debt to be paid to your business, those Court Orders can be forcefully pursued through legal enforcement mechanisms. Each state has Civil Procedure legislation in place which sets out the mechanisms for Court processes and the enforcement mechanisms. These procedures are quite similar between each State.
The tribunals such as VCAT in Victoria, NCAT in New South Wales, QCAT in Queensland, SACAT in South Australia etc. provide a relatively speedy and less expensive method of resolving the disputes as an alternative to the Court. However, it is prudent to check first whether your situation falls under the tribunal’s purview.
Unlike the courts, the tribunals are not bound by the rules of evidence. Secondly, each party in a proceeding before the tribunal has to bear its own costs. Additionally, the tribunal’s jurisdiction to award costs is very limited and is only enlivened when the tribunal is satisfied that it is fair to award costs given the circumstances.
Creditors Statutory Demand
A creditors statutory demand has the effect of asserting significant pressure and serving a statutory demand can result in almost immediate and often full payment of the outstanding amount as soon as that legislative demand has been served.
Another very common mechanism is a creditor statutory demand, which can be pursued pursuant to the Corporations Act 2001 (Cth). If the time lapses you can enforce the debt against your debtor in the case is a company by way of seeking windup orders forcing your debtor to be wound up if the debt is unpaid and in circumstance where the presumption of insolvency has arisen.
Once there is a presumption of insolvency, the creditor can then commence proceedings within three months to wind up the debtor company.
In summary, the most effective debt collection strategy is to have proper payment mechanisms and internal processes in place. Also to understand who it is your business is contracting with before any work or debt has arisen. If an invoice is not paid on time it is important to act quickly to address the problem of non-payment.
Strategies you can take include direct communication with the debtor, engagement of lawyers to help you resolve the dispute or quite possibly legal action in Court. Securing outstanding payment from a debtor is often about creating the right amount of pressure. Often, one of the most effective ways to apply pressure is through issuing a credit to statutory demand.
Lawyers at AMK Law aim to resolve your situation including the payment of amounts which have been outstanding for periods of time. This is achieved in ways that preserve your business relationship and when necessary through the Courts and other legal processes available.
Next Steps to debt recovery
If you are in a debt recovery dispute, need advice or if you need representation you can contact us today by calling (03) 8564 8474 or you can book online an appointment via the homepage.
Important disclaimer: The material contained in this publication is of a general nature only and it is not, nor is intended to be, legal advice. This publication is based on the law as it was prior to the date of your reading of it. If you wish to take any action based on the content of this publication, we recommend that you seek professional legal advice.