Unpaid debts can have a significant impact on the cash flow and operation of a business.
Whether the debt arises from an unpaid invoice, loan agreement, supply arrangement or
other contractual obligation, allowing an outstanding account to remain unresolved can make recovery increasingly difficult.
Fortunately, creditors in New South Wales have a number of options available to recover
outstanding debts. The appropriate strategy will depend on factors including the amount
owed, the age of the debt, whether liability is disputed, the financial position of the debtor and whether the debtor is an individual or a company.
Understanding the debt recovery process can assist creditors in deciding when to negotiate, when to commence proceedings and, importantly, how to enforce a judgment once it has been obtained.
Before Commencing Proceedings
Court proceedings should not necessarily be the first step taken when an account becomes overdue.
In many cases, early communication with the debtor can resolve the matter without the time and expense associated with litigation. This may involve contacting the debtor to determine why payment has not been made and whether the debt can be resolved through immediate payment or an agreed payment arrangement.
Creditors should also review the documents supporting the debt. Depending on the circumstances, these may include:
- the relevant contract or credit agreement;
- terms and conditions or terms of trade;
- invoices and account statements;
- purchase orders or delivery records;
- correspondence with the debtor; and
- records of payments or acknowledgements of the debt.
It is particularly important to ensure that the correct debtor has been identified before legal proceedings are commenced. For example, a company, individual, sole trader, partnership and trustee may require different considerations when determining the appropriate defendant.
Letter of Demand
Where informal attempts to obtain payment have been unsuccessful, a formal Letter of Demand will often be the next step.
A Letter of Demand generally identifies the debt, explains the basis upon which it is claimed, specifies the amount outstanding and provides the debtor with a final period in which to make payment.
The letter may also notify the debtor that legal proceedings may be commenced without further notice if payment is not received.
A properly drafted Letter of Demand can be an effective recovery tool. It provides the debtor with a final opportunity to resolve the matter while demonstrating that the creditor is prepared to take further action if necessary.
However, care should be taken to ensure that the amount claimed is accurate and that the creditor has an appropriate legal basis for the demand.
Commencing Court Proceedings
If the debt remains unpaid, a creditor may consider commencing legal proceedings by filing a Statement of Claim.
The appropriate court will generally depend on the amount being claimed.
In New South Wales, the Local Court has civil jurisdiction for claims of up to $100,000. Claims of up to $20,000 are ordinarily dealt with in the Small Claims Division, while claims exceeding $20,000 and up to $100,000 are generally dealt with in the General Division.
Larger claims may need to be commenced in the District Court or Supreme Court of New South Wales, depending on the amount and circumstances of the dispute.
Once filed, the Statement of Claim must be properly served upon the defendant.
The defendant then has an opportunity to respond to the proceedings. Broadly, the defendant may pay the debt, attempt to negotiate a resolution, file a defence disputing the claim or take no action.
Default Judgment and Defended Proceedings
Where a defendant fails to file a defence within the required period, the creditor may be entitled to apply for Default Judgment.
Default Judgment allows judgment to be entered without the matter proceeding to a contested hearing, provided the relevant procedural requirements have been satisfied.
If a defence is filed, however, the proceedings become contested. The parties may then be required to prepare and serve evidence, participate in directions hearings or other case management processes and, if the dispute cannot be resolved, ultimately proceed to hearing.
For this reason, creditors should consider the strength of their documentary evidence before commencing proceedings, particularly where they anticipate that the debt will be disputed.
Obtaining judgment is an important step, but it does not necessarily result in payment. If the judgment debtor does not voluntarily satisfy the judgment, enforcement action may be required.
Enforcing a Judgment Debt
The appropriate enforcement method will depend heavily on what is known about the judgment debtor’s financial circumstances.
One commonly used option is a Garnishee Order. A garnishee order may require a third party holding money belonging to the judgment debtor to pay funds towards the judgment debt. Depending on the circumstances, this may include a bank or the judgment debtor’s employer.
Another option is a Writ for the Levy of Property, under which the Sheriff may take steps to seize and sell certain property belonging to the judgment debtor and apply the proceeds towards the outstanding judgment.
Choosing an enforcement method strategically is important. Obtaining judgment against a debtor who has limited income or assets may not immediately result in recovery, and creditors should consider recoverability before incurring substantial enforcement costs.
Corporate Debtors and Statutory Demands
Where the debtor is a company, a creditor may also consider issuing a Creditor’s Statutory Demand for Payment of Debt under the Corporations Act 2001 (Cth).
A statutory demand is not simply another debt collection letter. It is a formal insolvency process and should only be used in appropriate circumstances.
The statutory minimum is currently $4,000. Once a statutory demand has been properly served, the company generally has 21 days to comply with the demand or apply to have it set aside.
Failure to comply may result in a presumption of insolvency, which can provide a basis for an application to wind up the company.
Importantly, a statutory demand should not be used where there is a genuine dispute about the existence or amount of the debt. Creditors should therefore obtain legal advice before using the statutory demand procedure.
Bankruptcy Proceedings Against Individuals
Where a judgment has been obtained against an individual, bankruptcy proceedings may also be available in appropriate cases.
A creditor holding a qualifying final judgment of at least $10,000 may be able to apply for a bankruptcy notice. Once served, the debtor generally has 21 days to comply.
Failure to comply with a bankruptcy notice can constitute an act of bankruptcy and may provide a basis for further bankruptcy proceedings.
Bankruptcy should not, however, be viewed as an automatic method of recovering a debt.
The financial circumstances of the debtor, available assets, competing creditors and likely costs should all be considered before taking this step.
Do Not Ignore Limitation Periods
One of the most important considerations in any debt recovery matter is the age of the debt.
Under the Limitation Act 1969 (NSW), many claims arising from contracts or debts are subject to a six-year limitation period, generally running from the date on which the relevant cause of action accrued.
Different limitation periods can apply in particular circumstances, including claims founded
on deeds.
Creditors should therefore avoid allowing debts to remain dormant for extended periods. The fact that a debt is properly documented does not mean that proceedings can be commenced indefinitely.
Similarly, once judgment has been obtained, creditors should remain proactive about enforcement rather than assuming that a judgment can simply be left indefinitely.
Taking a Strategic Approach to Debt Recovery
Effective debt recovery is not simply about commencing proceedings as quickly as possible. The objective should be to identify the most commercially appropriate pathway to recovering the debt.
Before taking action, creditors should consider the amount owed, available evidence, potential disputes, limitation periods, the debtor’s financial circumstances and the likely costs of recovery.
In some matters, a carefully drafted Letter of Demand or negotiated payment arrangement may achieve the best commercial result. In others, commencing proceedings and obtaining judgment may be necessary. Where judgment has already been obtained, selecting the appropriate enforcement method can make the difference between holding a judgment on paper and actually recovering the money owed.
Obtaining legal advice at an early stage can assist creditors in assessing their options and developing a recovery strategy appropriate to the circumstances.