10 Mar Where’s my money? I want to be paid and that means now!!!
There is no doubt 2020 was a year that turned the world upside down, inside out and changed the way the word “unprecedented” will be used forever.
Initially, there was good reason to be patient and allow debtors further time to pay their debts. It was after all “unprecedented” and this is what Mr. Morrison PM so politely asked us to do…
Fast-forward into 2021, many months after Covid-19 first made its way to our shores, and your customers’ debts continue to go unpaid. You’ve had enough. You are no longer sure whether the excuses provided by customers are genuine and even if they are, quite frankly, you just can’t keep “carrying the can”.
Typically, you have already issued your invoice for payment, sent a letter or email setting out the amount owed (including how to make payment) and followed this up with numerous phone calls, emails and maybe even confronted the customer in person and placed their account on stop credit.
So, what do you do now?
This article will explore the typical steps taken to enforce recovery of a debt and some of the commercial and practical considerations that should be considered throughout the various stages.
1. Identify the entity that owes the debt (the Debtor)
In most cases, this will be relatively easy. You will have an account application form, purchase order or contract that clearly states the entity or entities that owe you the debt. It is however important you correctly identify the type of entity (that is, a company, person/individual, partnership of companies or individuals) that owes you the debt as this determines your options in the later stages of debt recovery.
You may need to seek assistance from a professional (such as a debt collector or lawyer) to identify the correct entity as it is not always easy, particularly in more complex dealings.
2. Engage a debt collector or lawyer to issue a demand letter
It is remarkable how many debts get paid after a stern demand letter is sent by a debt collector or lawyer. For a large number of debtors, this is the prompt they need to get the debt paid.
A demand letter may also be the catalyst to consider a resolution without the need to commence legal proceedings. You might be wondering why you might consider compromising the debt and accepting a lesser amount at this point, particularly when there are no good reasons the debt shouldn’t be paid. The answer is that money has a time-cost value, litigation can be both costly and time consuming and there is no certainty as to the outcome.
When you are seeking to recover a debt, you should keep in mind the old adage “a bird in the hand is worth two in the bush”.
3. Commence legal proceedings to recover the debt
If demands are ignored or you otherwise aren’t getting anywhere, the most common action to take is to commence legal proceedings to recover the debt.
Just the action of commencing legal proceedings can sometimes elicit a response from a debtor, similar to the response shown when a demand letter is received. You should be aware that once you commence legal proceedings, it is not always as simple as “walking away” from your claim if you no longer wish to pursue the matter or the costs outweigh the benefits. The Court has certain processes which must be followed before a claim can be withdrawn.
The purpose of commencing legal proceedings is usually to obtain judgement against the Debtor for the amount owed to you (although there can sometimes be multiple purposes). A judgement is formal recognition through the Court system that you are owed a debt by a party.
Obtaining a judgement allows you to pursue further options to enforce recovery of the debt, most commonly to issue a Statutory Demand or Bankruptcy Notice (although it is not always necessary to obtain a judgement to issue a Statutory Demand).
4. Issue a Statutory Demand or Bankruptcy Notice
If your debt isn’t disputed and / or you have obtained a judgement for the amount owed, you are able to issue a Statutory Demand or request that a Bankruptcy Notice be issued to the Debtor.
Both a Statutory Demand and Bankruptcy Notice are formal demands for the payment of a debt, which, if not complied with, constitute events of insolvency.
If the Debtor is a company, a Statutory Demand is issued to the Debtor. If a company fails to comply with a Statutory Demand, it is presumed to be insolvent (see section 459C of the Corporations Act 2001 (Cth) (Corporations Act).
If the Debtor is an individual, a request needs to be made to issue a Bankruptcy Notice to the Official Receiver (a delegate of the Australian Financial Security Authority, the Federal Government Department that regulates and controls personal insolvency in Australia).
To issue a Bankruptcy Notice, you must have obtained a judgement against the Debtor. If a Bankruptcy Notice is not complied with, the Debtor is deemed to have committed an “Act of Bankruptcy” (see section 40 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act)).
5. Commence Court proceedings to wind up or bankrupt the Debtor
Once a deemed event of insolvency has occurred, you can instruct a lawyer to commence Court proceedings to have the Company placed into Liquidation or the Individual made Bankrupt. You can rely on the Debtor’s failure to comply with the Statutory Demand or Bankruptcy Notice to support your application.
If you are successful with your application, in the case of a Debtor Company, a Liquidator will be appointed to wind up the Company. In the case of an Individual Debtor, a Bankruptcy Trustee will be appointed to administer their Bankrupt Estate.
A Liquidator or Bankruptcy Trustee will investigate the Company’s/Individual’s affairs and where it is permissible under the Corporations Act or Bankruptcy Act and it is commercially viable to do so, seek to recover assets of the Company/Individual. The Liquidator or Bankruptcy Trustee will provide you with reports on the financial position of the Company/Bankrupt Estate and advise the likelihood of a dividend payment.
The debt owed to you is claimed in the Liquidation or Bankruptcy and you are entitled to receive dividends paid to creditors. In some cases, you will not receive a dividend payment and there are no other options for you to be paid your debt (in which case, the debt will need to be written off as not recoverable).
The payment of all or part of your debt (that is, a dividend payment) largely depends on the amount of funds recovered into the Liquidation/Bankruptcy, the costs of conducting the Liquidation/Bankruptcy and the amount of funds owed to other creditors of the Company/Individual.
In Australia, your options to recover an unpaid debt are varied (particularly if all or part of the debt is disputed). This article has not covered all options available. You should seek specialist advice from an accredited debt collection expert or lawyer if you intend to take formal steps to recover a debt.
SV Partners deals with leading debt collection specialists and litigation lawyers across Australia. Contact your local SV Partners’ office today to discuss your options and get the right team and advice to help you or your clients get paid.