DLS Updates – Debt Collection basics for Businesses

Debt Collection basics for Businesses

Is your business protected by its Credit Application and/or Terms of Trade?

It is important to ensure that your credit application and terms of trade provide your business with adequate protection should a customer (the Debtor) fail to pay for goods and/or services it has purchased.

Your credit application and terms of trade should provide you with security over the goods which you have sold to the customer and, if the customer is a corporate entity, ensure that the directors of the company provide you with personal guarantees. You must, however, ensure that you register any security over goods on the Personal Property Securities Register. We recommend that you speak with our lawyers to assist you with this process to ensure that the registration is not void.

If you do not have a credit application and/or terms of trade in place, or you suspect that your credit application or terms of trade need some updating, our lawyers are able to assist you.

Ensuring you have adequate protection via your credit application and/or terms of trade may simplify and speed up the debt collection process.

What options are available if my business is owed money?

If your business is owed money for goods or services, the first step in attempting to recover it is generally to send a letter of demand to the other party setting out the amount of money outstanding and giving them a defined period of time within which to settle the matter by paying you the money owed or face legal action.

If the debtor is a company, another option may be to issue a Creditor’s Statutory Demand.

Both these options are discussed below:-

Letter of Demand

The letter of demand can be sent by your business (the creditor) or your lawyer and warns the debtor that if they don’t pay the debt within a certain time period debt recovery proceedings in a Court with the appropriate jurisdiction will be commenced.

A letter of demand should be the last letter a creditor sends before issuing court proceedings. While letters of demand are not court documents, they are often an effective means of forcing the debtor to take action.

It is a good idea to first contact us to ascertain whether it is prudent to proceed with court proceedings and this will often depend on the size of the debt. Naturally, if the sum owed is small, it may not be commercial to pursue the debt by engaging a lawyer or even pursuing the debt at all. You must, however, ensure that in enforcing your rights to recover the debt, you act within the law.

When sending a letter of demand, you should be careful not to harass the debtor or send a letter which is designed to look like a court document.

You must not pursue a person for a debt unless you have reasonable grounds for believing the person is liable for the debt.

Creditor’s Statutory Demand

A Statutory Demand is a creditor’s formal, written request requiring a debtor company to pay a debt within 21 days of service. Serving a Statutory Demand has serious consequences and a creditor should obtain legal advice to ensure it is entitled to serve such a demand.
The requirements are set out in s459E of the Corporations Act 2001 (Cth), which are:

  • it must relate to a debt or debts that are due and payable and total at least $2,000;
  • it must specify the debt and its amount;
  • it must be in writing, in accordance with the prescribed form, which is Form 509H;
  • it must require compliance with the demand within 21 days after the demand is served on the company;
  • it must be signed by or on behalf of the creditor; and
  • if the creditor is relying on a debt that is not a judgment debt, the demand must be accompanied by an affidavit that verifies that the debt is due and payable and complies with the rules.
If a debtor company is served with a Statutory Demand, it has 21 days from service of the demand to either comply with the demand (i.e. pay the debt) or apply to the Court to have the demand set aside.

If a debtor company fails to comply with a Statutory Demand within the time provided, the debtor company is presumed insolvent under the Corporations Act 2001 (Cth). Within three months from the date of non-compliance, the creditor may rely on the presumption of insolvency and make an application to the Court for orders winding up the debtor company.

Can a Debtor dispute the debt?

The debtor has the right to dispute a debt and may do so on grounds such as:

  • it is not their debt;
  • they have already paid the money;
  • they disagree with the amount of the debt; or
  • the Creditor’s claim for payment is brought outside the 6 year limitation period.
There are also certain provisions under the Corporations Act 2001 (Cth) that give a debtor company the right to set aside a Statutory Demand, one of those being that there is a genuine dispute as to the debt.

If the debt is disputed then you, as the creditor, may have no alternative but to commence legal proceedings as long as it is reasonable and cost effective to do so.

Limitation Periods

A creditor has a limited period of time to sue for a debt. In most instances, for debts owed, this will be 6 years.

If the debtor has made no payments towards the debt or has not acknowledged in writing that they owe the debt, for a period of 6 years from when the debt arose, then the debt may no longer be recoverable.

When your lawyer becomes involved?

If you are not willing to negotiate or wait for payment, or the debtor/debtor company is disputing the debt, you may wish to contact us to assist you with pursuing the debt

If the size of the debt does not warrant that the commencement of legal proceedings, then we may still be able to help you to negotiate a payment plan that is manageable to the debtor and acceptable to you.

It is not in the debtor’s interest to ignore your claim and risk the additional costs of legal fees and interest on top of the original debt.

Conclusion

You should contact us to discuss your legal rights and obligations if you are owed money or even if you owe money to someone else who is threatening court action.

If you would like more information or require assistance or advice on how to proceed in debt recovery matters please contact us.