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Bad debt is a pressing issue for business owners, and the burden only increases over time. Debt is an unnecessary administrative burden to your business. Additionally, the more time that passes between the date payment falls due and the date payment is received, the higher the risk your client may default in repayments. It is always worthwhile that you 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 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 where legal proceedings are unsuccessful, the court may award costs in favour of the borrower.

This may mean an additional cost borne by the lender in addition to the unpaid debt. 

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. 

Which court you can use depends on the amount of the debt. 

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 (which can then file a defence to the cross-claim);
  • discovery and subpoenas, whereby the parties make available to each other documents relevant to legal proceedings;
  • 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);
  • there is a hearing before the court.

Ultimately at the end of the hearing, the judge or magistrate presiding over legal proceedings 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. 

3. Enforcing Judgement

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

You can seek to enforce the judgement 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

If you make a judgment against an individual, you will often find they are more likely to voluntarily repay the debt than they would have been prior to the judgment. This is in order to avoid the lender taking any other action to enforce the debt. This option does not require much action from you, 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 of execution. A writ of execution 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 the whole, or substantially the whole, of a company’s assets. In that case, you have the option to enforce the charge by appointing an administrator to control the company’s business. The administrator may: 

  • 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. They are appointed to receive and distribute the income and assets of a company that is in financial difficulty. The role of the receiver/manager is to sell and recover enough of the company’s assets to repay the debt to the lender.

You should be aware that although the receiver/manager’s primary duty is to the secured creditor, they will also have an obligation to unsecured creditors. This obligation to unsecured creditors involves taking reasonable care to sell assets for their market value or the best price reasonably obtainable and report to them on the receivership.

Applying for a Garnishee Order

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. 

A garnishee order is an order issued by a court to a third party requiring the third party to pay money that it would ordinarily pay to the: 

  • borrower;
  • lender; or 
  • court.  

It operates from the date of the order until the debt payable to the lender is repaid in full.

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. To explore the legal avenues available to recover debt, contact LegalVision’s dispute and litigation lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What type of legal proceedings are available to a lender in NSW?

In New South Wales, legal proceedings may be commenced in the Local Court, District Court or Supreme Court. Which court you are able to commence proceedings in will depend on the amount of debt at issue.

What is the role of an administrator?

If you appoint an administrator, their role is to control the company’s business. The administrator may carry on the company’s business or sell the business or any of the company’s assets.

What is the role of a receiver/manager?

They are appointed to receive and distribute the income and assets of a company that is in financial difficulty. Their role is to sell and recover enough of the company’s assets to repay the outstanding debts to the lender.

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