As we adjust to living with COVID-19 and as businesses regroup, our Dispute & Litigation team has noticed an increase in requests from both individuals and businesses seeking to take steps to enforce debts that are owed to them. Caroline Callegari explains.
Not only are individuals and businesses ramping up their enforcement action but the Australian Taxation Office (ATO) has also begun its enforcement process by issuing Director Penalty Notices (DPN) in greater numbers.
What does this mean for Creditors?
The ATO’s action is likely to see a number of unviable companies go into liquidation and individuals become bankrupt. If you are a creditor, this means that any security interests you have are going to be more important than ever when it comes to recovering debts owed to you.
Accordingly, if your contracts provide you with a security interest, for example a right to caveat or a right to register a security interest on the Personal Property Securities Register (PPSR), we recommend that you take steps to register those interests and to make sure that this process is done correctly. In addition, you should also consider reviewing your template contracts and trading terms in case they can be tightened to give you greater security for payment.
Options to recover a debt owed
In today’s climate, we recommend that you do not delay in taking steps to enforce your debts, especially if you are an unsecured creditor. In an insolvency situation, the claims of unsecured creditors are ranked last. As a creditor, the earlier you address a debt owed to you, the better, as there may be options available to you to recover all or most of the money owed.
Creditors have a range of options to recover a debt. The good news is that there are solutions that do not involve litigation.
- Firstly, start by reviewing your contractual documents to see what rights you do and don’t have and what steps might be available to you under your contract terms.
- Secondly, confirm (exactly) what your position is – how much is owed, from when, from whom and for what.
- Thirdly, once you have a clear understanding of your position as a creditor, we always recommend that you talk to your debtor to find out why the debt has not been paid. Is it because they have an issue with a good or service you have provided and they want to negotiate a discount? Did an invoice become mislaid? Do they need more time to pay? The answers to these questions will inform what you do next and whether it would be worthwhile negotiating with the debtor. Frequently, we find that discussing the situation with the debtor leads to payment.
Discussing the situation with the debtor, also enables you to gather information on the debtor’s circumstances. These details can be useful for deciding what your next steps should be. If the debtor is a longstanding customer or a key account, you may decide to continue trading with them, whereas for an infrequent or new customer, you may decide otherwise.
Once the situation is clear, a number of options are available:
- Payment Plans
If a debtor asks for time to pay, it is up to you, as the creditor, whether to negotiate a payment plan. If you do negotiate a payment plan, we always recommend that the details are recorded in writing between the parties, at least by way of an email confirming what was agreed. If a payment plan is agreed, you should monitor compliance until the debt is repaid in full. It can also be a good idea to make it clear that if the payment plan is not adhered to, and if payments are missed or late, that you reserve the right to take action immediately to recover the remainder of the outstanding debt.
You might also consider negotiating some form of security for payment in exchange for agreeing to the payment plan, such as, obtaining a director’s personal guarantee. This would give you some additional enforcement rights if the debtor does not comply with the payment plan. In our experience, obtaining security for a debt owing is a strong motivation for the debtor to pay!
- Letter of Demand
If talking to your debtor does not work or is not possible, the next step is to send a demand for payment. A demand formally puts the debtor on notice that payment is outstanding and also gives them a deadline to make payment. Sometimes it is sufficient for the demand to be issued on your letterhead, but at other times a formal demand from a lawyer may be required and this is where we can help.
- Statutory Demand
If the debt is owed to you by a company and there is no genuine dispute about the debt, then you may be entitled to issue a Statutory Demand. A Statutory Demand gives the company 21 days to pay the debt, to reach another arrangement with the creditor, or to seek to have the demand set aside if the debt is disputed. If the debt is neither repaid nor disputed, the debtor company will have committed an act of insolvency and you can take steps to wind up the company. The process for issuing a statutory demand is a technical one. Special forms must be used and the correct information included, otherwise your statutory demand will be invalid.
A Statutory Demand is a useful mechanism for a creditor. As a failure to respond to a statutory demand has serious consequences, a debtor is likely to take notice if they receive one.
Note there can be serious repercussions if a Statutory Demand is issued when the legal requirements are not followed correctly, so always seek legal advice beforehand.
- Should I sue?
Of course, there is always the option is to sue. Court proceedings can be costly, but sometimes issuing proceedings is the only way to resolve a debt dispute. It is important to note that most Court proceedings settle before a trial Judge or a Magistrate. If you decide to sue, we can discuss appropriate options with you.
It is also important to note, that if your debtor eventually becomes insolvent within a certain period of time of paying you, there is a risk that payments made to you may be classified as an unfair preference. If this occurs, you may get a letter from an insolvency practitioner demanding that you repay the money which would then be distributed equally among the creditors. If you don’t repay the money you have received, recovery proceedings may be commenced against you. There are defences available if this circumstance arises, and it is wise to seek legal advice should you ever find yourself in this situation.
What if I owe money to my Creditors?
Regular and reliable cash flow is the lifeblood of any business ororganisation. From time-to-time, you might find yourself in a tight cash flow situation. This may be through no fault of your own, especially if you are owed money from your customers or if you have made advance payments for goods or services. If you happen to receive a demand letter, statutory demand or some other demand for payment, it is essential that you act quickly and seek advice. Missing a deadline could have very serious consequences for your business and even for you personally. In other words – do not delay, as inaction is only likely to make matters worse.
How Can Sharrock Pitman Legal Help?
Our lawyers have many years’ experience advising customers on the best approach to manage and resolve outstanding debts owed to their business or organisation.
If you are seeking to finalise a debt owed to you or if you have received a letter of demand or statutory demand, please contact our litigation team by calling 1300 205 506 or email by email@example.com.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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For further information contact
Caroline Callegari is an Associate Principal and leads our Disputes & Litigation team. She has an advisory and advocacy practice in the following areas: Commercial Litigation, corporate and personal disputes, debt recovery and, insolvency and bankruptcy matters. Caroline can be contacted on (03) 8561 3324.