How to Improve your Debt Recovery Prospects


Article Summary

The article outlines strategies to enhance debt recovery prospects, focusing on legal protections through contract clauses in Queensland. Here’s a detailed summary:

Key Points

  1. Importance of Proper Contract Drafting: For businesses offering trade credit, it’s crucial to have well-drafted contract clauses that aid in debt recovery, potentially making you a secured creditor, especially in insolvency scenarios.
  2. Charging Clause: This clause requires a debtor to secure their debt with an equitable interest in property, such as real estate. It grants the creditor the status of an equitable mortgagee, thereby prioritising their claims in insolvency situations over unsecured creditors.
  3. Director’s or Personal Guarantee and PPSA Charging Clause: These clauses allow creditors to hold directors personally liable for business debts and secure claims against personal property, significantly enhancing debt recovery chances.
  4. Default Terms: These terms can include provisions for default interest, recovery of legal costs on an indemnity basis, and debt collection costs, which ensure that creditors can reclaim a significant portion of their expenditures incurred in debt recovery.

Practical Applications

  • Caveat Lodgment: A charging clause allows creditors to lodge a caveat on the debtor’s property, which prevents the debtor from transferring ownership until the debt is settled.
  • Legal Enforcements: The creditor might negotiate the private sale of the debtor’s property, with settlement involving a bank cheque for the outstanding sum, or they might use a court order to maintain a strong negotiating position.

Impact of Insolvency

  • Secured vs. Unsecured Creditors: Secured creditors, thanks to clauses like the charging clause, retain the ability to enforce their security interests even during the debtor’s insolvency, unlike unsecured creditors who face significant limitations under insolvency laws.


In this article, our debt recovery lawyers emphasise the necessity of having specific legal clauses in credit contracts to ensure a robust debt recovery process. It suggests that by preparing and using the legal tools available, businesses can significantly improve their ability to recover debts and protect their financial interests against default and insolvency.

This comprehensive guide serves as a valuable resource for businesses and legal professionals dealing with commercial debt recovery.

How to Improve your Debt Recovery Prospects in Queensland Stonegate Legal

Improve your Debt Recovery Prospects

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:

  1. A charging clause;
  2. A director’s or personal guarantee;
  3. PPSA charging clause; and
  4. Default terms.

Improve your Debt Recovery Prospects – Charging Clause

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.

Improve your Debt Recovery Prospects – Enforcement

There are a number of different ways that a creditor can recover their debts by enforcing the judgment 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.

Try reading this article on Caveat Emptor – Buyer Beware

Another great clause to include in your credit application or contract is a director’s guarantee.

Improve your Debt Recovery Prospects with Director’s Guarantees

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”).

Improve your Debt Recovery Prospects with 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:

  1. Default Interest – allowing you to claim a higher rate of interest on all outstanding debts;
  2. Legal Costs – allowing you to recover all reasonably incurred legal costs on the indemnity basis;
  3. 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:

  1. 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;
  2. The debtor company defaults on the debt;
  3. 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 [2013] 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.

Improve your Debt Recovery Prospects – Construction

Improving debt recovery prospects in construction debts with a subcontractor’s charge under the Building Industry Fairness (Security of Payment) Act 2017 (BIFA) in Queensland, Australia, involves several key steps that leverage legal mechanisms to enhance a subcontractor’s ability to collect due payments:

  1. Issue a Notice of Claim: Subcontractors must serve a Notice of Claim to the person or entity obligated to pay the contractor. This notice should accurately detail the work done and the amount owed. This initial step is crucial as it establishes the legal basis for the subcontractor’s claim.
  2. Correct Identification of Parties: It’s essential to accurately identify and involve the correct parties in the notice, including the subcontractor, contractor, and the superior contractor (or project owner). Misidentification can invalidate the claim.
  3. Certification by a Qualified Person: The details of the work performed by the subcontractor must be certified by a qualified person, such as a registered architect or engineer. This adds credibility to the claim and ensures compliance with regulatory requirements.
  4. Adherence to Strict Time Limits: The Notice of Claim must be served within specific time limits, generally within three months after the practical completion of the work for ongoing contracts, or within three months after the expiration of the defects liability period for retention money.
  5. Ensure Proper Documentation and Procedures: Utilizing the approved forms (like FORM S122 for the Notice of Claim) and following the prescribed procedures in BIFA enhances the effectiveness of the claim. Failure to comply with procedural requirements may result in the loss of secured interest.
  6. Engage Legal Assistance: Given the complexities and strict procedural requirements, engaging a solicitor to assist with the Notice of Claim and any subsequent legal processes is highly recommended to ensure that all legal bases are covered.

By following these steps, by issuing a subcontractor’s charge, a subcontractor can significantly improve their prospects of recovering debts, particularly in situations where the contractor may be experiencing financial instability or facing insolvency.

This process not only secures the subcontractor’s financial interests but also ensures they have a priority over other creditors in recovering funds.

Improve your Debt Recovery Prospects – FAQ

Welcome to our FAQ section where you can find detailed answers about improving your debt recovery prospects.

Discover essential information on legal clauses, creditor rights, and effective strategies to enhance your business’s financial security.

What is a charging clause?

A charging clause in a credit contract requires a debtor to secure their debt with an equitable interest in property, such as real estate. This makes the creditor an equitable mortgagee and elevates their status to that of a secured creditor, providing them with greater security in debt recovery.

How does a director’s guarantee work?

A director’s guarantee involves the directors of a debtor company personally guaranteeing the company’s debts. This means if the company fails to meet its obligations, creditors can pursue recovery from both the company and the personal assets of the directors.

What is a PPSA charging clause?

A Personal Property Securities Act (PPSA) charging clause allows a creditor to secure an interest over the debtor’s personal property, which does not include real estate. This security interest is registered on the Personal Property Securities Register (PPSR) and can include goods provided on credit.

What are the benefits of having a charging clause in a credit agreement?

Having a charging clause gives a creditor a higher priority in the event of the debtor’s insolvency, as it establishes a secured interest over real property. This can be more advantageous than an unsecured director’s guarantee in insolvency scenarios.

How does lodging a caveat work?

When a charging clause is used, a creditor can lodge a caveat on the debtor’s property. This legal notice prevents the debtor from selling or transferring the property until the debt is resolved or the caveat is removed, securing the creditor’s interest.

What is the process to lodge a caveat in Queensland?

In Queensland, a creditor with a caveatable interest from a charging clause can lodge a caveat against the debtor’s property. The debtor then has a specific period, defined by law, to challenge the caveat in court or resolve the debt.

What happens if a debtor company goes into liquidation?

If a debtor company goes into liquidation, secured creditors with a charging clause can continue to enforce their security interests. In contrast, unsecured creditors may be unable to commence or continue legal actions for debt recovery.

Can legal costs be recovered in debt recovery proceedings?

Yes, if the credit contract includes clauses for the recovery of legal and debt collection costs, creditors may be able to recover these expenses from the debtor as part of the debt recovery process.

What is a default interest clause?

A default interest clause in a credit agreement allows a creditor to charge a higher rate of interest on outstanding debts after a default occurs, increasing the overall recoverable amount from the debtor.

What is the effect of a guarantee to improve your debt recovery prospects?

A director’s personal guarantee increases the likelihood of debt recovery by holding the director personally responsible for the company’s debts, providing an additional avenue for recovery if the company lacks sufficient assets.

How does the Personal Property Securities Register (PPSR) assist in debt recovery?

The PPSR allows creditors to register their security interests over personal property, ensuring their priority over other unsecured creditors and enhancing their ability to seize and sell the collateral if the debtor defaults.

What legal protections exist for secured creditors during insolvency?

Secured creditors are protected under insolvency laws, allowing them to realise or deal with their security interests despite the debtor’s insolvency status, unlike unsecured creditors who face significant restrictions.

What is the significance of a PPSA charging clause in a credit contract?

A PPSA charging clause is crucial for creditors providing goods on credit as it enables them to register a security interest over the goods, enhancing their ability to recover the goods or their value if the debtor defaults.

What should be included in a credit contract to Improve your Debt Recovery Prospects?

A credit contract should include charging clauses, personal or directors’ guarantees, PPSA charging clauses, and detailed default terms, including provisions for recovering legal and debt collection costs.

Why is it important to seek legal advice when drafting debt recovery clauses?

Debt recovery laws and regulations can be complex, and improper drafting of clauses can lead to unenforceable terms or legal challenges. Legal advice ensures that the clauses are legally sound, tailored to specific business needs, and enforceable in court.

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