A debt recovery lawyer can offer advice and assistance with all commercial disputes and legal debt recovery, including how to improve your debt recovery prospects.
Debt Recovery can be a time consuming but necessary part of running a business in Queensland.
By failing to prepare, you are preparing to fail – Benjamin Franklin
Debt recovery in Queensland can be made a lot easier with specially drafted contract clauses.
If you run a business that offers trade credit to your customers, then it is vital that you have properly drafted contract clauses in relation to the recovery of debt.
A properly drafted credit contract by a qualified debt recovery lawyer can assist with the debt recovery process and can even elevate you to the status of a secured creditor. This is especially helpful in the event of insolvency.
Some must-have clauses in your credit contract include:
- A charging clause;
- A director’s or personal guarantee;
- PPSA charging clause; and
- Default terms.
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A charging clause requires the debtor to secure the debt with an equitable interest in property (most likely Real Property or Land). This equitable interest is created from the charge and makes the creditor an equitable mortgagee, elevating the creditor to the status of a secured creditor.
This charge is a charge over company property (if any) but can also be a charge over the director’s personal property.
A charge over property is essentially a guarantee that in the event of a default, the creditor’s equitable interest in the debtor’s real property is realised and the debtor can take steps to satisfy the debt as equitable mortgagee.
Charging Clause Example
There is a lot of case law on this subject, and the wording of the charging clause may vary, however a typical charging clause example will read something like:
By entering into this credit agreement, you agree to charge in favour of XXXX, all your estate and interests in any land which you have or may later acquire, with payment of all monies that you owe to XXXX, presently or into the future.
The main advantage in having a charging clause in the credit agreement or contract is that a charge over real property has a higher priority in insolvency than an unsecured director’s guarantee.
Effectively this makes the caveat holder (or equitable mortgagee) a secured creditor.
Lodge a Caveat over the Debtors Property
A properly worded charging clause over the property of the company or the director(s) of the company allows for the creditor to lodge a caveat over the property of the company or the director(s).
Only a person with a caveatable interest can lodge a caveat in Queensland, an equitable mortgage or charge is a caveatable interest.
In Queensland, a caveator has three (3) months or fourteen (14) days after being served with a notice pursuant to section 126 of the Land Title Act 1994 (Qld) to start a proceeding in a court of competent jurisdiction to establish the interest claimed under the caveat. Section 126 says:
A caveatee of a caveat to which this section applies may serve on the caveator a notice requiring the caveator to start a proceeding in a court of competent jurisdiction to establish the interest claimed under the caveat.
This means that the creditor company (caveator) has the legislated timeframe to apply to the Court for an order establishing the caveatable interest.
During this time, the effect of the caveat is such that the debtor cannot sell or transfer their interest in the land until such time as the caveat is removed. Contact our debt recovery lawyers to discuss lodging a caveat.
Debt Recovery Enforcement
There are a number of different ways that a creditor can recover their debts from this point in matters of debt recovery.
The creditor may agree that the debtor may privately sell the real property and have a bank cheque for the outstanding sum at settlement (in exchange for an executed release of caveat).
Alternatively, a creditor with a correctly lodged caveat with an order of the Court is in a fantastic negotiating position, and may wish to enter into some other arrangement secured by the caveat, and the threat of selling their family home.
Another great clause to include in your credit application or contract is a director’s guarantee.
Essentially, a company (the creditor) enters into a contract with another company (the debtor) and the director(s) of the debtor company personally guarantees the outstanding debts owed by the debtor company (the guarantor), making the debt recovery process easier.
This means that if the company does not meet its obligations, then you are able to recover from the company and the personal guarantors of the company.
In a number of cases, the company that you are trading with may simply be trading as a small business with no real assets. In this instance it is best to secure the obligation of the company with the personal assets of the director(s).
However, you might also be able to use a Personal Property Securities Act 2009 (Cth) (“PPSA”) to secure your property by lodging a charge on the Personal Property Securities Register (“PPSR”).
PPSA Charging Clause
The PPSA is legislation about security over personal property. Similar to how a caveat attaches to real property, a security interest, registered on the PPSR, creates a security interest and attaches to personal property (other than real property).
A typical example would be a car finance company lodging a charge on the PPSR over the car to which the finance relates, as security for the loan.
So, if you provide goods on credit, then a PPSR charging clause allows you to charge those goods until payment for those goods has been made.
The PPSA allows a creditor in this situation to seize the goods (Collateral). Section 123(1) of the Personal Property Securities Act 2009 (Cth) says:
A secured party may seize collateral, by any method permitted by law, if the debtor is in default under the security agreement.
Can you Recover your Legal Costs
There is no legal right to recovery of your debt collection and legal costs, unless awarded by the Court or tribunal, prescribed by legislation, or unless allowed for in your credit contract.
Carefully worded default clauses in your credit contract may allow you to recover most of your legal and debt collection costs including the cost of a debt recovery lawyer.
Some examples of some good default clauses would be:
- Default Interest – allowing you to claim a higher rate of interest on all outstanding debts;
- Legal Costs – allowing you to recover all reasonably incurred legal costs on the indemnity basis;
- Debt Collection – allowing you to recover all non-legal costs in relation to debt collection;
Please speak to our lawyers in relation to your debt recovery clauses in your credit contract.
What is a Typical Debt Recovery Scenario?
A typical debt recovery in Queensland scenario might look something like this:
- The creditor and debtor companies enter into a contract to provide goods and services on credit, with the directors of the company guaranteeing the debts of the company by signing a charge over their personal real property as a security for the debt;
- The debtor company defaults on the debt;
- A demand can be made to the debtor company and the director of the debtor company under the director’s guarantee, and a caveat lodged over the director’s real property.
The Effect of Insolvency as an Unsecured Creditor
If the debtor company goes into liquidation, the creditor can usually no longer commence or sustain proceedings against the debtor company for the payment of the unpaid and unsecured debt. This then triggers the director’s guarantee.
If the director of the debtor company has guaranteed the debts of the company, then the action may be brought the director as guarantor. If the director of the debtor becomes bankrupt, the creditor can usually no longer commence or sustain proceedings against the debtor director as guarantor of the unpaid and unsecured debt.
Without charging clauses in the contract, the creditor is effectively an unsecured creditor and will have to get in the queue behind other creditors with priority, and wait for a dividend (if any) from the liquidated estate of the company and/or the bankrupt estate of the director.
An unsecured creditor will not be able to commence or continue with legal action against an insolvent company pursuant to section 471B of the Corporations Act 2001 (CTH) which says:
While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with:
(a) a proceeding in a court against the company or in relation to property of the company; or
(b) enforcement process in relation to such property;
except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.
The Effect of Insolvency as a Secured Creditor
With a charging clause and a caveat, the debtor company will be a secured creditor and will usually have priority over unsecured creditors.
Alternatively, if the debtor company goes into liquidation, then a creditor who has an interest secured by a charge at the commencement of the liquidation, and has elevated themselves to the status of a secured creditor, can take advantage of section 471C Corporations Act 2001 (CTH) which says:
Nothing in section 471B affects a secured creditor’s right to realise or otherwise deal with the security interest.
In MSI (Holdings) Pty Ltd v Mainstreet International Group Ltd  QCA 27 Gotterson JA with whom White JA and Applegarth J agreed said:
The expression “security interest” is defined in s51A to have a meaning which includes a charge.
Section 9 of the Corporations Act 2001 (CTH) defines “charge” as:
“charge” means a charge created in any way and includes a mortgage and an agreement to give or execute a charge or mortgage, whether on demand or otherwise.
So a charge is a security interest, and as such section 471B does not apply to the security interest, and the secured creditor is allowed to realise that interest, even in the event of insolvency.
Further, if you have carefully drafted contract clauses relating to the default by the debtor, then you may be able to recover most of your debt collection fees, and legal fees.
This area of law is very complex and failure to adhere to strict legal requirements and time-frames may result in serious consequences. We strongly advise getting legal advice from a suitably qualified debt recovery lawyer
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OR CALL: 1300 545 133 FOR A PHONE CONSULTATION