How Do You Recover a Debt From a Company?

In Short

• Legal action should be a last resort: Before initiating court proceedings to recover a debt, consider alternative methods such as negotiation, mediation, or issuing a letter of demand.

• Understand the legal process: If legal action becomes necessary, be aware of the steps involved, including filing a statement of claim, the possibility of the debtor filing a defence, and the court’s procedures.

• Be mindful of time limits: Legal proceedings to recover a debt must be initiated within six years from the date the debt became due.

Tips for Businesses

To enhance your debt recovery process, maintain clear and consistent communication with debtors, and document all interactions. Consider offering flexible payment options to encourage repayment. Before resorting to legal action, evaluate the debtor’s ability to pay and the potential costs involved. Seeking legal advice early can help you navigate the process effectively.

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Table of Contents

• 1. Consider Commencing Legal Proceedings
• 2. Understand the Process
• 3. Enforcing Judgement
• Key Takeaways 
• Frequently Asked Questions

Bad debt is a pressing issue and creates an unnecessary administrative burden on your business. This burden only increases over time. Additionally, the longer the period between the due date and the payment date, the higher the risk that your client may default on repayments and the greater the strain to your cash flow. It is always worthwhile to first consider how to recover a debt without going to court. However, in some circumstances, this option may no longer be appropriate. This article sets out the key considerations when commencing legal proceedings to recover debt from another company that defaults on payment.

1. Consider Commencing Legal Proceedings

For many reasons, the decision to commence legal proceedings to recover debt should not be taken lightly. Further, you certainly should not make this decision without first seeking legal advice. You should be aware of the risk that if your legal proceedings are unsuccessful, you may be financially worse off than the position you were in before commencing proceedings. This is because the court generally awards costs in favour of the successful party.

The time frame for commencing legal proceedings is important, and as a business owner, you should ensure you do not miss the limitation period. For most contract-related debts, the limitation period extends from 6 years from the time the borrower defaults on the loan. You must commence legal proceedings before the limitation period expires.

2. Understand the Process

The type of legal proceedings available to a lender depends on the nature of the debt and the amount of the debt. For example, in New South Wales, legal proceedings may be commenced in the: 

• Local Court (there are a number of different divisions); 
• District Court; or 
• Supreme Court.

You should be aware that legal proceedings generally follow the same general process, which includes:

• the lender, being the party commencing legal proceedings, files a statement of claim and serves the statement on the borrower (and any other party);
• the borrower files and serves a defence, which sets out whether the borrower admits or denies the lender’s claim;
• if the borrower also has a claim against the lender, then in addition to filing a defence, the borrower should file a cross-claim against the lender (who then has an opportunity to file a defence to the cross-claim);
• discovery and subpoenas, whereby the parties make available to each other documents relevant to the legal proceeding;
• the parties file their evidence, which is generally in the form of affidavits prepared by witnesses (for example, a representative of the lender who can give information about the debt);
• the parties attend a hearing before the court.

Ultimately at the end of the hearing, the judge or magistrate presiding over the legal proceeding delivers a judgment setting out their decision and the reasons for the decision. If the decision is made in your favour as the lender, then you can consider the proceeding successful.

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3. Enforcing Judgement

If the judgment is made in your favour, and neither party appeals the decision, the next step involves enforcing a judgment against the other party.

You can seek to enforce the judgment either by:

• seeking voluntary repayment;
• seizing assets or property;
• appointing an administrator;
• appointing a receiver/manager; or
• applying for a garnishee order.

Seeking Voluntary Repayment

You will often find that obtaining a judgment against a company increases the likelihood of voluntary repayment. This is because debtors are typically more motivated to repay the debt post-judgment to avoid further enforcement actions being taken by the lender. This option does not require much action from the lender, and the key incentive for the borrower will be avoiding any further court orders.

Seizing Assets or Property

If you have obtained a judgment against a borrower and would like to use the proceeds of sale of the borrower’s property to repay a debt, then you must apply to the court for a writ for the levy of property. A writ for the levy of property authorises the local sheriff to seize property and sell it at public auction. If you are successful in obtaining the writ, this will mean you have a legal right to have the borrower’s property sold and for the debt to be repaid out of the proceeds of sale, after payment of the sheriff’s costs and the auction costs.

Appointing an Administrator

Suppose you have a charge over all, or substantially all of a company’s assets. In that case, you have the option to enforce the charge by appointing an administrator. The administrator assumes control of the company’s operations and holds the power to:

• carry on the company’s business;
• sell any of the company’s assets; or
• sell the business.

Appointing a Receiver/Manager

If you are a secured creditor, you also have the option to seek to have a receiver/manager appointed. The receiver/manager is tasked with  and distributing the income and assets of a company that is in financial difficulty. The primary objective of the receiver/manager is to sell and recover sufficient company assets to repay the debt owed to the secured lender(s).

Although the receiver/manager’s primary duty is to the secured creditor, they also have obligations to unsecured creditors. These include:

• taking reasonable care to sell assets for their market value or the best price reasonably obtainable; and
• providing reports to unsecured creditors on the receivership process.

Applying for a Garnishee Order

A garnishee order is a court-issued directive to a third party (typically a bank or employer) requiring them to redirect money that would ordinarily be paid to the borrower. The redirected funds may be paid to the lender (creditor) or the court.

You can apply to the court for a garnishee order if you are aware that the borrower: 

• currently has funds that can satisfy the judgement debt within their bank account; or
• are likely to receive payments to their bank account in the near future. 

There may be limits on how much can be garnished, especially from wages, to ensure the borrower retains sufficient funds for living expenses.

Key Takeaways 

As a business owner, it is best practice to keep clear records of all contracts, invoices and repayment details relating to any advance of money made, in the event you need to recover debt. Additionally, you should also ensure you can produce records of any correspondence with the lender discussing repayment.

If you are owed money, our experienced debt recovery lawyers can assist as part of our LegalVision membership. For a low monthly fee, 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 1800 534 315 or visit our membership page.

Frequently Asked Questions