Small business debt recovery can be a painful yet necessary part of running your small business or SME.
If you have a small business or a medium enterprise then you will know how time consuming and frustrating business to business (“B2B“) debt recovery can be.
Getting a small business debt recovery law firm to recover your outstanding invoices can save a lot of time and stress.
This article will cover the following steps in the debt recovery process:
- Initial Steps, Formal Letter of Demand
- Legal Action and Court Proceedings
- Enforcement of Money Orders
- Statutory Demands and Bankruptcy Proceedings
- Preventive Measures
- Cost of Debt Recovery
If you have ever thought “I need a debt recovery law firm for my business” then this article outlines the advantages and disadvantages of using a debt recovery lawyer for your small business debt recovery, and the small business debt recovery laws in Queensland.
CONTACT A DEBT RECOVERY LAWYER TODAY
OR CALL: 1300 545 133 FOR A PHONE CONSULTATION
Small Business Debt Recovery
The best way to stop bad debt occurring in your small business is to avoid giving credit to your clients. However, this is not always possible!
For the rest of us, we sometimes have to offer credit terms to a client, and occasionally those clients / customers are unwilling or unable to pay their invoices.
In those instances there are a number of things that you can do as a small to medium business owner.
How to Collect a Debt from a Business
Firstly, you should attempt to negotiate with this debtor. At this point they might still be a valuable client, just hitting a hard-patch.
The first step in small business debt recovery is to send the debtor business a friendly reminder letter or email first. Always set a time and date for repayment, so you will know if they breach the friendly reminder.
If the friendly reminder does not get you paid, then you should sent the debtor an overdue reminder. In small business debt recovery, an overdue reminder is more formal and business-like than the friendly reminder. It should be commercial, direct and not insulting or embarrassing.
The overdue reminder should also set a time for repayment, and can include a further copy of the invoice.
If your debtor still does not pay your invoice by that time, you should then proceed with a final notice. A final notice letter is the first chance that the debtor has until things start getting serious.
A final notice should again stipulate a final date in which they have to pay. If they do not pay your overdue invoice by that date, then you should serve them with a formal letter of demand.
Formal Letter of Demand
A formal letter of demand is the first formal step in the small business debt recovery process. A formal letter of demand puts the debtor on notice that you intend to take the matter further if they do not pay.
The basic requirements of a formal letter of demand are:
- Amount of the small business debt;
- Date the debt was due and payable (7, 14, or 30 day payment terms);
- Date of the Letter of Demand (it is important ;
- Description of the debt (such as invoice number, goods bought ect.); and
- Any relevant evidence such as contracts, invoices, emails agreeing to work or other written agreements that you have with the person/company you are claiming the money from.
- A time and date on which the debtor has to pay the debt. We suggest giving then 7 or 14 days.
- And you must be aware of any claim amount limitations (i.e. minimum and maximum dollar amounts), and any time restriction limitations for claiming your debt.
If you still do not get any response from this small business debtor, then you can commence legal action to recover your business debt. But what responses should you expect from a debtor?
Unfortunately, you will not usually recover all of your unpaid debts, all of your time taken during your small business debt recovery efforts, all of your outgoings and costs associated with this business to business debt collection. As unfair as that sounds, the system does not allow for this.
So, before marching-off to the Courts or Tribunals, it is sometimes worthwhile attempting alternative dispute resolution (“ADR”) avenues such as mediation, arbitration, conciliation, for example. If there is a dispute about the type, quality or amount of the goods and/or services provided, or there is a genuine dispute in relation to the invoice, then ADR could be a good choice.
However, ADR will cost you, so if you are certain that your debtor will not pay, then you can commence proceedings to recover the outstanding invoice or invoices.
The Small Business Debt Recovery Process
If you are thinking about filing a claim in Court or if you should you sue the debtor, then you will need to know the commercial debt recovery process.
It is usual in “business to business” (“B2B”) debt recovery that you can commence legal proceedings in the Court with monetary jurisdiction, or in the Queensland Civil and Administrative Tribunal (“QCAT”).
Commencing Proceedings in Court
In Queensland the Courts have the following monetary jurisdictions:
- Magistrates Court of Queensland – up to $150,000.00;
- District Court of Queensland – up to $750,000.00; and
- Supreme Court of Queensland – over $750,000.00.
Most B2B minor debt claims are commenced in the Magistrates Court. The Magistrates Court has jurisdiction to hear claims of up to $150,000.00, and so it will be a rare case that a company would have let this amount of debt accrue in credit before doing something about it. Not always, but most of the time.
Claim and Statement of Claim
Debt recovery proceedings in the Magistrates Court are commenced by claim and statement of claim. It is vital that you engage suitably qualified debt recovery solicitors to draft these Court documents.
Once the documents are drafted, filed, and sealed with the Court’s seal, you will then have to attend to personal service of these documents. Personal service of an originating process is effected in different ways depending on who the defendant(s) are.
Personal service on a company is different to personal service on a person, and they are both made in different ways to personal service on a partnership.
It is vital that you know the exact entity you contracted with and serve the originating process on it accordingly.
If the debtor does not file and serve a notice of intention to defend and a defence within 28 days of serving the claim and statement of claim, then you can request default judgment.
Small Business Debt Recovery in QCAT
In the minor debt jurisdiction, QCAT has a jurisdictional maximum limit of $25,000.00.
This means that it can only hear debt recovery matters up to $25,000.00.
An application to QCAT is very similar to a claim and statement of claim in the Magistrates Court. You draft, file and serve the application on the debtor.
Once served, the small business debtor has 28 days to file a response. If you do not get a response filed and served by the debtor, then you will get a default decision, similar to a default judgment in the Magistrates Court.
If you do not think that you can do this yourself, then you should give serious consideration to engaging a debt recovery law firm.
Enforcement of Money Orders
A judgment from the Court is an enforceable money order.
A decision from QCAT, once registered in the Magistrates Court becomes an enforceable money order.
Rule 793 of the Uniform Civil Procedure Rules 1999 (QLD) (“UCPR“) says:
“enforceable money order” , of a court, means:
(a) a money order of the court; or
(b) a money order of another court or tribunal filed or registered under an Act in the court for enforcement.
A money order can be enforced in a number of different ways, including:
- Applying for an enforcement warrant; or
- Bankruptcy; or
- Winding up a debtor company.
Enforcement Warrants
There are a number of different enforcement warrants you can apply for to enforce your small business debt recovery money order.
Chapter 19 of the Uniform Civil Procedure Rules 1999 (QLD) (“UCPR”) deals with the enforcement of money orders.
Starting at section 828 of the UCPR it outlines the procedure for a warrant for seizure and sale of a debtor’s real property and personal property to enforce a small business judgment debt.
Starting at section 839 of the UCPR it outlines the procedure for a warrant for redirection of debts to enforce a small business judgment debt.
Starting at section 847 of the UCPR it outlines the procedure for a warrant for redirection from financial institutions to enforce a small business judgment debt.
Starting at section 855 of the UCPR it outlines the procedure for a warrant for redirection of earnings to enforce a small business judgment debt.
Starting at section 868 of the UCPR it outlines the procedure for an order to pay the judgment debt by instalments to enforce a small business judgment debt.
If you can provide the evidence needed to apply for one of the enforcement warrants above, then this may be your best option.
However, in your small business debt recovery proceeding, if the debtor is a company (Debtor Company Pty Ltd for example) then you can serve this company with a statutory demand, which is the first step in the liquidation process.
Or alternatively, if the debtor is a person (sole trader for example) and they are being difficult, or trying to hide assets, then you can serve them with a bankruptcy notice, which is the first step in bankruptcy proceedings.
Statutory Demands in Small Business Debt Recovery
If you have a judgment debt, more than the statutory minimum of $4,000.00 then you can serve the debtor with a statutory demand for payment.
Section 9 of the Corporations Act 2001 (CTH) says:
“statutory minimum” means:
(a) if an amount greater than $2,000 is prescribed–the prescribed amount; or
(b) otherwise–$2,000.
The prescribed amount is $4,000.0 from 1 July 2021.
A statutory demand with a judgment in support has a lot more impact that with an affidavit in support because the statutory demand is easier set-aside with an affidavit.
So, if you have a judgment debt of $4,000.00 or more, and the debtor in a company registered with the Australian Securities and Investments Commission (“ASIC”), then you can serve the debtor with a statutory demand as part of the small business debt recovery process.
If the debtor company does not pay, nor compound (enter into an agreement) that is accepted by you, then the company is deemed to be insolvent. Based upon that presumption of insolvency, you can apply to wind them up in liquidation.
If you do not think that you can do this yourself, then you should give serious consideration to engaging a debt recovery law firm.
Bankruptcy and Small Business Debt Recovery
If a judgment debtor is a person, and the judgment debt is over $10,000.00 then you can serve the debtor with a bankruptcy notice.
Section 44 of the Bankruptcy Act 1966 (CTH) says:
(1) A creditor’s petition shall not be presented against a debtor unless:
(a) there is owing by the debtor to the petitioning creditor a debt that amounts to hat amounts to the statutory minimum or 2 or more debts that amount in the aggregate to the statutory minimum, or, where 2 or more creditors join in the petition, there is owing by the debtor to the several petitioning creditors debts that amount in the aggregate to the statutory minimum;
(b) that debt, or each of those debts, as the case may be:
(i) is a liquidated sum due at law or in equity or partly at law and partly in equity; and
(ii) is payable either immediately or at a certain future time; and
(c) the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition.
A bankruptcy notice is a notice from the Official Receiver – the Australian Financial Security Authority (“AFSA”).
Failure to comply with a bankruptcy notice, or successfully set the bankruptcy notice aside, within the 21 day limit, will mean that the judgment debtor has committed an act of bankruptcy. It is based upon this act of bankruptcy that you will be then entitled to present a creditors petition to the Federal Circuit Court.
Payments in the Building and Construction Industry
One of the exceptions to the small business debt recovery procedure above is if you and/or the debtor work in the building and construction industry.
The Building Industry Fairness (Security of Payment) Act 2017 (Qld) (“BIFA”) allows for an easier procedure to recover outstanding debts.
If eligible, then you might be able to make a BIFA payment claim. If the debtor does not serve you with a payment schedule within the allowable time, then you can apply to the Court or an adjudication to settle this matter.
BIFA payment claims are complicated and strict adherence to the legislated timeframes is paramount. It is vital that you seek advice and assistance from a suitably qualified debt recovery solicitor.
You can also serve the head contractor with a BIFA subcontractors’ charge. A subcontractors’ charge essentially charges the money owed by your debtor.
Business Steps to Avoid Bad Debt Occurring
This article has outlined the fairly detailed process of small business debt recovery. But how we can help your small business avoid getting bad debts and avoid small business debt recovery altogether.
To help decrease your risk and exposure to bad business debts you can:
- State clearly all of the payment options and payment terms on the contracts and/or invoices; and/or
- If you supply goods, register your interest on the Personal Property Security Register (“PPSR”); and/or
- Keep in contact with the debtors and keep well within safe credit limits; and/or
- Give your customers a discount or other incentives for the early payment of their invoices; and/or
- Do not provide the products until the debtor has made payment; and/or
- Do a background check as part of the credit application process, a current extract from ASIC will give you some credit information, or a credit company.
Business Steps to Increase Chances of Enforcement
However, no matter how diligent you are, if you are in business long enough, you will have to engage with a bad debtor in small business debt recovery.
In order to maximise your chances of success you can do some or all of the following (if applicable):
- Always get written contracts and credit agreements, signed by all of the parties;
- Ensure that your contracts are strong in relation to a default and small business debt recovery proceedings, including good default clauses;
- A good default interest clause – the law allows for interest to be recovered, so a default in payment should trigger an enforceable interest amount;
- Liquidated damages clause – If allowable, your contract should allow for a liquidated damages clause – you need to be mindful that this is a genuine pre-estimate of costs, and not a penalty;
- Directors / personal guarantees – if you are entering into a contract with a company, you should get directors or personal guarantees;
- PPSR Charges – the contract should allow for a PPSR charge to be lodged as security for the credit. If you are selling goods, over the goods, or a floating charge over the present and after-acquired personal property of the business;
- Charging Clause – If applicable, a charging clause which allows for a caveat to be lodged over the real property of the debtor, as security.
How much does Debt Recovery Cost
Our debt recovery solicitor fees are fixed in some cases. This means that for certain tasks, in certain parts of the small business debt recovery proceeding, we offer fixed fees.
For example, for a letter of demand – drafted, revised (if needed), then emailed and posted to the debtor we offer as a fixed fee.
If you have ever thought “I need a debt recovery law firm for my business” then this article outlines the advantages and disadvantages of using a debt recovery lawyer for your small business debt recovery, and the small business debt recovery laws in Queensland.
CONTACT A DEBT RECOVERY LAWYER TODAY
OR CALL: 1300 545 133 FOR A PHONE CONSULTATION
FAQs on Small Business Debt Recovery
Navigating the complexities of debt recovery can be a daunting task for small businesses. To assist you in understanding and managing this crucial aspect of business operations, we have compiled a list of frequently asked questions.
These FAQs provide insights into the steps, legal considerations, and best practices for effective debt recovery, specifically tailored for small businesses in Queensland, Australia.
Whether you’re dealing with overdue invoices or considering legal action, these answers aim to guide you through the process of securing your financial interests.
What is the first step in small business debt recovery?
The first step in small business debt recovery is to send a friendly reminder to the debtor. This initial communication should be amicable, setting a specific date for repayment. It’s important to maintain a professional tone, as the debtor might still be a valuable client facing temporary difficulties. If this approach fails, a more formal overdue reminder should follow, escalating to a final notice if necessary.
What should be included in a formal letter of demand?
A formal letter of demand should clearly state the amount of the debt, the due date, a description of the debt (like invoice numbers), and any relevant evidence such as contracts or written agreements. It should also specify a deadline for payment, typically 7 or 14 days. This letter serves as a formal notice of intent to take further action if the debt is not settled.
When should a small business consider legal action for debt recovery?
Legal action should be considered if all initial attempts to recover the debt, including the formal letter of demand, have been unsuccessful. Before proceeding, it’s important to evaluate the likelihood of recovering the debt versus the costs and time involved in legal proceedings. Legal action typically involves filing a claim in the appropriate court, depending on the amount owed.
What are the monetary jurisdictions of courts in Queensland for debt recovery?
In Queensland, the Magistrates Court handles claims up to $150,000, the District Court up to $750,000, and the Supreme Court for amounts over $750,000. Most small business debt recovery cases are likely to fall within the jurisdiction of the Magistrates Court, as it’s rare for a small business to accumulate a larger debt without prior action.
How can a judgment debt be enforced?
Once a judgment is obtained, it can be enforced through various warrants. These include seizure and sale of the debtor’s property, redirection of debts or earnings, and orders for payment by instalments. The specific type of warrant depends on the debtor’s circumstances and the nature of their assets.
What is a statutory demand in the context of small business debt recovery?
A statutory demand is a formal request for payment of a debt, typically used when the amount exceeds $4,000. It’s a precursor to liquidation proceedings for companies and bankruptcy proceedings for individuals. Serving a statutory demand puts the debtor on notice of potential serious legal consequences if the debt remains unpaid.
What options are available for debt recovery in the building and construction industry?
Under the Building Industry Fairness (Security of Payment) Act 2017, there are specific procedures for debt recovery in this industry. These include making a BIFA payment claim and, if necessary, applying for court adjudication. This process is streamlined compared to general debt recovery but requires strict adherence to legislated timeframes.
What preventive measures can small businesses take to avoid bad debts?
To minimize the risk of bad debts, businesses should clearly state payment terms on contracts and invoices, conduct background checks during the credit application process, and consider registering interests on the Personal Property Security Register. Offering incentives for early payment and maintaining contact with debtors can also be effective.
What are some steps to increase the chances of successful debt enforcement?
To enhance the likelihood of successful debt recovery, it’s advisable to have written contracts and credit agreements, strong default clauses, and enforceable interest amounts for late payments. Where applicable, securing directors’ or personal guarantees, lodging PPSR charges, and including charging clauses for lodging caveats can be beneficial.
How are debt recovery costs managed for small businesses?
Some law firms, like Stonegate Legal, offer fixed fees for certain debt recovery services, such as drafting a letter of demand. This approach provides cost certainty for small businesses. However, the overall cost of debt recovery can vary depending on the complexity of the case and the extent of legal proceedings required.
If you have ever thought “I need a debt recovery law firm for my business” then this article outlines the advantages and disadvantages of using a debt recovery lawyer for your small business debt recovery, and the small business debt recovery laws in Queensland.
CONTACT A DEBT RECOVERY LAWYER TODAY
OR CALL: 1300 545 133 FOR A PHONE CONSULTATION
