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Every business will eventually face the problem of clients or customers who refuse to pay. In many cases, a business will not pursue unpaid invoices for some time to maintain the business relationship. This can result in accounts that are substantially in arrears. So what should a business do to recover money on overdue accounts? This article explains your options for debt recovery in NSW.

Preliminary Debt Recovery Steps

Before you take legal action, you should consider other, less adversarial ways of recovering the debt. These include direct communication, alternative dispute resolution (ADR) and issuing letters of demand.

These preliminary steps are the most cost-effective ways of pursuing debt recovery in NSW. If these methods are unsuccessful, a creditor should think carefully about the amount of money they are trying to recover before commencing court proceedings.

Direct Communication

Direct communication (whether by phone or email) can be a good way of ascertaining why a debtor (the person or company that owes money) has not been able to pay. Sometimes all that you need to do is to negotiate a repayment plan. The debtor may just be experiencing a sudden low period in their business.

However, you should not harass a debtor. If they fail to respond to polite inquiries, you may have little choice but to proceed to court if you want to recover the debt.

Alternative Dispute Resolution

ADR may also be an option for debt recovery in NSW if a debtor is willing to participate. One method of ADR is mediation whereby an impartial third party (the mediator) will facilitate negotiations between the parties. The parties need to reach a consensual agreement for mediation to resolve the issue.

The construction industry commonly uses adjudication to resolve debt disputes. This can often quickly and cost-effectively recover money owed under a construction contract. The adjudicator’s decision is binding and a court can enforce it if needed.

Letters of Demand

If communication does not yield a result, and the debtor does not engage in ADR, then the most common next step is to issue a letter of demand.

A letter of demand is a formal request for payment. It will set out the:

  • amount owing;
  • payment deadline; and
  • consequences if payment is not made, including recovery through legal proceedings.

Court Proceedings to Enforce a Debt

To commence legal proceedings in NSW, a creditor must file a statement of claim with the appropriate court. The appropriate court depends on the amount of the debt. For example, the NSW Local Court can hear claims of up to:

  • $100,000 in its general division; and
  • $10,000 in its small claims division.

The path (and cost) of court action will depend on whether the debtor files a defence to the proceedings. If a defence is filed, then both parties will submit evidence and attend a hearing.

However, if the debtor does not file a defence, the creditor can apply for a default judgment. This is a judgment entered against the debtor without a hearing. The order for payment of money in a default judgment is referred to as a ‘judgment debt’.

Once a creditor has a judgment debt, they can take further enforcement action.

Exploring Enforcement Options

If your debtor fails to comply with a court judgment and does not pay the amount due, then you must enforce the judgment. In NSW, creditors can start enforcement proceedings at any time up to 12 years from the judgment date.

Before seeking court orders and commencing enforcement proceedings, a creditor can take steps to ascertain the best way forward. These are:

Investigation method Details
Examination notice This is a form sent to a judgment debtor that requires them to answer questions about their assets, income and other debts
Examination order An application to the court for an order requiring the judgment debtor to attend court and answer questions about their assets, income and other debt
Conducting investigations of property ownership, insolvency and bankruptcy status Involves searching government records and registers, or engaging a private investigator


Taking Enforcement Action

When it comes time for formal enforcement action, a creditor can seek the following court orders:


Order Explanation
Garnishee order Issued to a third party that either holds money on behalf of a debtor (such as a bank) or owes money to the debtor (such as an employee), requiring that party to deduct money from the account or wages and pay it towards the debt owed.
Writ of execution (or levy of property) Directs the sheriff’s office to seize and sell property of the debtor to pay the creditor.
Writ for possession of property Directs the sheriff’s office to seize and sell the debtor’s real property (i.e. land or a residence) to pay the creditor.


Where debts are above a certain amount, there are also other options for debt recovery in NSW. These include bankruptcy proceedings (against an individual debtor) or a creditor’s statutory demand (against a company debtor).

Bankruptcy Proceedings

A creditor may seek a court declaration that the debtor is bankrupt. The creditor may do this where the debt is over $5,000. However, if the application is to enforce a judgment debt, the creditor must do so within six years of the judgment date. Bankruptcy proceedings result in the debtor surrendering control of their money and other assets to a trustee. The trustee then aims to pay the bankrupt’s creditors.

Statutory Demands

A creditor may issue a statutory demand against a debtor where:

  • the debt is over $2,000; and
  • the debtor is a company.

A statutory demand is a legal document issued under section 459E of the Corporations Act 2001 (Cth). It requires the debtor to pay within 21 days.

A statutory demand can be issued with or without a judgment debt. However, doing so without a judgment carries a risk that the debtor will ask a court to set aside the demand on the basis that there is a ‘genuine dispute’ as to the amount or existence of the debt.

If the debtor fails to comply a statutory demand, this implies that they are insolvent. As such, the creditor can commence winding up proceedings. However, the downside of winding up a debtor is that the company may have limited or no assets. In this case, if the creditor is unsecured, they may not get paid at all.

Key Takeaways

If you are trying to recover a debt, explore preliminary options first, such as direct communication and alternative dispute resolution. It can be expensive to start bankruptcy and winding up proceedings. This, coupled with the risk that a creditor may not get paid in the end, creates a strong argument for investigating the debtor’s financial status first.

If you need advice on how to proceed with debt recovery in NSW, call LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.


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