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If your business is owed money from another business or individual, you may be wondering how to recover it. This process is known as debt recovery. It involves collecting any outstanding debts and minimising the risk of future non-payment. As a creditor you have various options for recovering debt from a debtor. This article sets out some debt recovery options available to creditors.
Issue a Letter of Demand
The first stage in the debt collection process is usually to issue a letter of demand. This is a formal letter requesting payment of the debt. It sets out the specific amount owed and the period in which the debtor can make payment before you take further legal action.
Sometimes, issuing a letter of demand can result in the parties entering into negotiations concerning the debt payment. If parties reach an agreed payment plan, they can enter a binding settlement deed outlining the agreed proposal. This payment plan can be in full or instalments.
Initiate a Claim in Court
Before commencing legal proceedings, you should carefully consider your position and ensure you have a strong claim. This is because if you make a claim and are unsuccessful, the court may make a costs order against you. This means you must pay a portion of the other party’s legal costs.
If you choose to make a legal claim, the basic steps in court proceedings will be as follows:
- Creditor (i.e. the party initiating proceedings) files a claim in court and serves a statement of claim on the debtor (and any other party) setting out their claim;
- Debtor files and serves a defence (usually within 28 days from the date of service of the claim), setting out whether the debtor admits or denies the creditor’s claim;
- If the debtor fails to file a defence, the creditor can apply to the court to have a default judgment entered against the debtor;
- If the debtor also has a claim against the creditor, then the debtor should file a cross-claim against the creditor (who can then file a defence to the cross-claim);
- Parties either file or exchange their evidence (generally in the form of affidavits); and
- Hearing before the court.
The judge or magistrate will deliver a finding after the hearing and set out their reasons.
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.
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Enforcing a Court Judgment
You can enforce the court’s judgment against an individual debtor through the following processes:
- writ for the levy of property whereby the court authorises the sheriff to seize and sell property belonging to the judgment debtor to pay the debt;
- garnishee order where the court issues an order to have money taken from the debtor’s bank account or wages;
- examination notice, where you ask to collect information about the debtor’s income and assets. If the debtor doesn’t comply with the notice within the given period (usually 28 days), you can ask the court to issue an examination order. This information can help you choose the best option to recover your money and take the right enforcement action. If the debtor does not comply with the notice in 28 days, you can have them examined before the court.
- court-declared bankruptcy where the judgment awarded is more than $10,000. However, this action is complex and expensive.
Issue a Statutory Demand
If a company owes a debt of $4,000 or more, a creditor can issue a formal demand under section 459E of the Corporations Act 2001 (Cth). A valid statutory demand must:
- be in writing;
- be signed by you or on your behalf;
- state the debtor’s company name and its registered office. You should get a new company search for the debtor company before issuing your statutory demand to check you have their latest details;
- state the total amount of debt owed; and
- specify a place in Australia where they can pay the debt. Generally, this is your office or your solicitor’s office.
An affidavit or judgment of a court must accompany the statutory demand.
A company that has been served with a statutory demand can apply to the court to have the demand set aside if they can show that:
- the debtor company has an offsetting claim against the creditor, which reduces the debt to below the statutory minimum; or
- there is a genuine dispute about either the amount of the debt or the nature of the debt itself.
The purpose of a statutory demand is not as a debt-collecting tool. If the debtor seeks to set aside the statutory demand, this process can be costly and ineffective.
Reach a Commercial Settlement
After issuing a letter of demand, legal proceedings or creditor’s statutory demand, you may have the option to negotiate a settlement with the debtor through correspondence. This will usually involve you compromising on the amount of the debt or the time the debtor has to pay.
You may also wish to explore mediation to seek a mutual resolution to the dispute. However, it is essential to remember that there is no guarantee that the other party will ‘come to the table’ to negotiate an outcome. Mediation can also be expensive, as the parties must appoint a mediator and pay other mediation costs, such as hiring a mediation venue. However, several government organisations offer cost-effective mediation services that you may wish to explore.
If a business or individual owes you debt, various options are available to you to recover the debt. Which option is best for you will ultimately depend on the amount of money owed and the circumstances of the case. If you need assistance recovering a debt or have any questions, our experienced debt recovery lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
As a creditor is the person or business that is owed money and a debtor is the person or business owing the money.
It is the first step in the debt collection process and involves sending a formal letter that requests the debt payment. The letter of demand will set out the specific amount owed, and the time the debtor has to make payment before the creditor takes further legal action.
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