Debt recovery

Debt recovery – refresher on managing your debtors

Managing debt is an integral part of any business and has come into particular focus in recent times as a result of the COVID-19 impacted economy.

By Sharon Levy, Partner and Scott Homan, Associate

Bartier Perry Lawyers

It is important for businesses to understand not only how to manage their debt, but also what options are available for those debtors who simply will not pay up.

In this article, we step through various debt recovery options and when each might be suitable for businesses in the hire and rental industry.

Letter of Demand

The first step in any debt recovery process will usually be a formal letter of demand. The purpose of these letters is to clearly and concisely set out: • the basis for the debt (such as an invoice or contractual right to payment); • the amount of the debt; and • a demand for payment within a set period of time.

A letter of demand can be issued by either the creditor itself or otherwise an advisor such as a solicitor, with the latter often carrying more weight. Consideration should also be given to the parties’ ongoing contractual relationship, including whether an additional demand for the return of hired goods can be included in the letter and whether there is a contractual basis to give written notice to terminate any hire agreement.

The letter of demand is an important and costefficient tool to recover an outstanding debt, as it can cause the debtor to take the matter seriously and make payment (or arrange to make payment). It will also assist to ground a right to take self-help steps to recover any equipment subject to the hire arrangement which can be an important option to manage debt in these circumstances.

Even if the debtor does not make payment, the failure to meet a formal demand can be important for any future litigation in demonstrating that the debt remains due and payable and can also be an important factor in claiming the costs of proceedings.

Statutory Demand

If the debt is $4,000 or greater, an alternative to a letter of demand is to issue a statutory demand to the debtor, provided the debtor is a company.

Statutory demands can be a powerful tool as a failure by a debtor to comply with the demand creates a presumption of insolvency against the recipient company. However, a statutory demand should never be used if you think there is a ‘genuine dispute’ over the debt (or offsetting claim), even if you think you would likely succeed on any adjudication of the debt.

A court will only consider whether there appears to be a genuine dispute at face value, it is not required to determine the merits of that dispute. For this reason, statutory demands are the most effective in situations where a judgment has already been obtained, and the demand is used as an enforcement tool.

The Corporations Act and Regulations prescribe the form and requirements for a statutory demand. If the debt is not a judgment debt, the statutory demand must be accompanied by an affidavit attesting that: a. the debt is due and payable; and b. there is no genuine dispute about the debt.

From the date of service of the statutory demand, the creditor has 21 days to make payment, failing which the debtor will be deemed insolvent unless it applies to a court to have the demand set aside.

The advantage of a statutory demand is that it carries more weight than a simple letter of demand. Once served, the debtor is required to either meet the demand or apply to set it aside. Failure to comply with the demand allows the creditor to make an application to the court to wind up the debtor in insolvency.

Alternative dispute resolution

early alternative dispute resolution. Examples can include negotiation, mediation or arbitration.

By engaging in these processes early, the parties have an opportunity to ventilate the issues in dispute to try and achieve an outcome without having to resort to the costly and time consuming process of formal debt recovery proceedings. This can be particularly important for businesses in the hire and rental industry, as the ongoing nature of equipment hire agreements can render the maintenance of the commercial relationship between the parties a compelling reason to resolve disputes amicably where possible.

In considering whether alternative dispute resolution might be advantageous, it is important to consider the amount of the debt, the likely costs to be involved in any recovery proceedings and the importance of recovering some (if not all) of the amount owing in a timely fashion.

Additionally, if a debt is based in contract, it may be a requirement of that agreement that the parties engage in a form of alternative dispute resolution before recovery proceedings can be commenced in court. It may be that in a negotiation or mediation, the parties can reach a settlement which, although it represents a payment of an amount below that which is owing, avoids the time and cost of recovery proceedings.

An advantage of alternative dispute resolution is that it can be tailored to suit the needs of the parties (subject to the requirements of any contract or applicable regime which specifies the method to be used). It can be as informal as a phone call between the parties or a round table negotiation, or it can also be a more formal mediation or arbitration, both of which introduce independent third parties and will often involve the parties’ legal representatives.

Although it appears that we can see light at the end of the COVID-19 tunnel, we encourage our clients to continue to carefully monitor their debtors and take the necessary steps to manage their cash flows in this uncertain market. Alternative dispute resolution plays an important role in balancing the time and legal cost of formally pursuing debts against the benefit of obtaining a quick and easy solution that meets the interests of all parties.

Recovery Proceedings

Finally, if a letter of demand is not answered, and if alternative dispute resolution is engaged but not successful, the creditor should promptly consider commencing recovery proceedings in the relevant court in the state or territory with appropriate jurisdiction. Once a claim is filed, the debtor will be required to file and serve a defence within a set period of time, failing which you may be entitled to file for default judgment. Further, if a defence is filed but does not disclose any proper legal basis to dispute the claim, you may be able to apply to strike out the defence and obtain summary judgment.

Alternatively, if a defence is filed with an arguable basis for resisting the claim, the parties will be required to each prepare and serve evidence in support of their respective cases. The court will then be required to determine the claim and enter judgment for either the claimant or debtor.

In our experience, recovery proceedings are lengthy (often between nine and 12 months between commencement and a hearing as a minimum). Recovery proceedings will require a filing fee on application (which varies depending on the jurisdiction) in addition to any legal costs you may incur. It is therefore important to carefully consider the cost of commencing proceedings as against the likelihood of success and the amount of the debt to be recovered.

If you require assistance with the debt recovery process, please reach out to our team at Bartier Perry.