Legal Debt Recovery Options for Businesses

Legal debt recovery is the process of using the Court process to legally recover debts from delinquent bad business clients.

If you have spent any time in business, you will know that bad debts / delinquent payers are common. It is just a part of doing business in Australia.

However, bad debts can have a serious impact on a business’s cash flow and may result in your company being temporarily illiquid or insolvent, if you are unable to pay your creditors.

This is potentially very serious.

In this article our debt recovery lawyers will essentially touch on the following:

1. Pre-debt recovery options / risk mitigation.
2. Alternative dispute resolution.
3. Commencing legal proceedings to obtain a money order.
4. Enforcement of the money order.

There is also a FAQ section at the bottom of this article.

Avoid the Need for Legal Debt Recovery

There is an old saying by Dutch philosopher Desiderius Erasmus:

Prevention is better than cure

So, the first step in the legal debt recovery process is steps to take before a bad business debt occurs, to mitigate the risk.

We have separated these into three (3) distinct categories:

1. Client management;
2. Credit management; and
3. Debtor management.

We will explain these in more detail below.

Client Management

There are a number of things that a business can do to lessen the risk of bad debts or delinquent payments, thereby preventing customer debt, when selecting clients who are eligible for credit.

Some of these things include:

1. Carefully choose your credit clients / customers.
2. Do a search on google and social media to see if there is negative content.
3. Do some research on trade credit insurance which may be right for your business.
4. Does this potential credit customer operate a payment run (monthly, 60 days, etc).
5. Ensure that you do checks before you offer credit to new clients / customers.
6. Ensure that you do credit checks and assess the clients’ creditworthiness.
7. Ensure that you know where and to whom to send the invoices (accounts, etc).
8. Learn about scam emails and cyber security to avoid payment issues.
9. You should factor any potential delays in payment into your cash flow forecast.

If you are careful in relation to which clients / customers you offer credit to, and actually do some due diligence, then this can avoid a lot of risk of bad business debts and the need for legal debt recovery.

The clients / customers who you do offer credit should also be managed correctly. We call this the credit management stage.

Credit Management

Ensuring that you manage your credit clients / customers correctly is pivotal in avoiding bad business debts and the need for legal debt recovery.

There are a number of tips and things to consider during the credit management stage.

These include:

1. Ensure that you enter into a valid written credit application.
2. Clearly state your terms and conditions including the default clauses.
3. Ensure that you approve any credit extensions before the bad debt occurs.
4. Ensure that you have up-to-date processes and systems.
5. Ensure that you keep communicating with the client / customer.
6. Ensure that you obtain sent / delivered receipts or use MYOB or XERO.
7. Ensure that you send invoices quickly, to the right person, with sufficient detail.
8. Ensure that you set reasonable payment terms and default clauses.
9. Have very strict processes for obtaining payment and follow up procedure.
10. Set a realistic credit limit with your credit clients.
11. Think about giving incentives or discounts for early payment of the invoice or pay commissions when money is received early.
12. Upon any late payment, have a money upfront or cash-on-delivery with that client.
13. Ensure that you outline your expectations to new credit customers.
14. Ensure that you train your staff in debt policies and procedures.

It is very important that you continue to manage your credit clients effectively to ensure that you continue to get paid, mitigate any long-term risk of bad payment, and therefore the need for legal debt recovery.

Lastly, if things do go badly (which happens) then you should implement a range of debt management procedures to try to recover the debt before the need for legal debt recovery.

Debtor Management

Anyone who has been in business for a while understands that you will occasionally have bad payers.

Even if you implement the above, you may still have instances where a client will not pay their invoice.

We call this the debtor management stage.

Before the need for legal debt recovery, you may be able to collect the debt in-house during the debtor management stage, utilising a few strategies. These include:

1. Immediately stop offering credit until the bad debt is recovered.
2. Renegotiate the trading terms with regular late paying clients.
3. Resolve any debt disputes quickly as the longer the debt is owing, the less likely it is to be recovered.
4. Strictly follow your debt collection procedures.
5. You may consider offering the client a discount for immediate payment.
6. You should chase payment of the invoice as soon as it is overdue.
7. Send friendly reminders, getting more serious with each letter / email.
8. Start informal negotiations to get them to acknowledge the debt and provide you with repayment options.
9. Send a letter of demand.

Any communication with your trade debtor must be for a reasonable purpose, and should only occur to the extent necessary to:

1. Give the debtor information about the debtor’s account
2. In order to ascertain why any agreed repayment plan has not been complied with.
3. In order to make arrangements for repayment of the debt
4. In order to propose a settlement or alternative payment arrangement to your trade debtor
5. In order to view, inspect or recover any security interest.
6. To accurately explain the consequences of non-payment, including any legal debt recovery options.
7. To ascertain why any earlier attempts to contact your trade debtor have not been responded to within a reasonable period.
8. To be able to review any existing contractual or credit arrangements.
9. To investigate whether your trade debtor has changed any business details without informing you.
10. To send a letter of demand for payment

There are also a few self-explanatory things that you must not do when seeking to recover these delinquent trade debts.

Unlawful Behaviour when Contacting a Debtor

Under Australian law, a person / business who is trying to recover a debt must not:

1. Deceive or mislead the trade debtor
2. Hassle or harass the trade debtor to an unreasonable extent.
3. Unconscionably take unfair advantage of any disability, vulnerability, or other circumstances affecting a trade debtor.
4. Use coercion or physical force to recover the debt.

Sometimes it feels personal between small business to small business, especially if you did a good job and they simply will not pay the invoice.

But care must be taken not to do anything unlawful when seeking collection of the debt.

Engaging a Non-Legal Debt Collector

If you have tried to recover this debt, and the trade debtor simply will not pay, then a step prior to engaging a debt recovery solicitor is to engage a business debt collector.

Debt collectors are professionals who may be able to negotiate repayments of the debt from your trade debtor. We have a unique relationship with Advance Debt Collection.

The main advantage of using a debt collector is that they are mostly no-collect, no-commission. This means that they do not charge a commission unless they collect the debt.

However, they are not lawyers, and most experienced debtors know that they do not have to respond to debt collectors.

If a debt collector cannot collect the debt, their only option would be to refer the matter to a debt recovery lawyer anyway.

So, if all else fails you should seek assistance from a debt recovery lawyer to provide advice and assistance with your legal debt recovery options.

For more on reducing your risk of bad business debts, read our article here – 30 Tips to Reduce Bad Business Debts.

Legal Debt Recovery Options

If you have a bad business debt, and the debtor just will not pay, then you may not have any choice but to write the debt off or engage a debt recovery lawyer to advise and assist with your legal debt recovery options.

The legal debt recovery process is essentially this:

1. Alternative dispute resolution.
2. Commencing proceedings to obtain a money order.
3. Enforcement of the money order.

This article will go more in-depth in relation to the above and explain the legal debt recovery process in more detail.

Alternative Dispute Resolution

Alternative dispute resolution (“ADR”) is the process of resolving legal disputes without the need for Court intervention.

Depending on the type of business the debt relates to, there are a number of alternative dispute resolution options, including:

1. Negotiation
2. Mediation
3. Conciliation
4. Arbitration
5. Adjudication

Our dispute resolution lawyers will explain these in more detail below.

Legal Debt Recovery – Negotiation

In some cases, a commercial or debt dispute can be resolved by way of negotiation.

Negotiating a settlement will usually be the most cost-effective way of recovering unpaid debts.

This is usually done by way of a lawyer’s letter of demand, followed by without prejudice offers and counteroffers to settle the debt dispute.

Once an agreement has been reached, then the terms are usually put into a deed of settlement and release which is binding on the parties.

Rather than spending money of lawyers, compromising the debt will usually provide the best outcome for the clients.

Legal Debt Recovery – Mediation

Another option is to attend a formal mediation.

This is usually done when there is a dispute about the goods and/or services provided, rather than simply non-payment of the invoice.

The mediator is usually a trained mediator or barrister. Again, the purpose of the mediation is to negotiate a settlement which will usually be put into a binding deed of settlement.

Find a mediator at the QLS – http://services.qls.com.au/

Legal Debt Recovery – Conciliation

Debt recovery claims for disputes such as unpaid wages and entitlements disputes may require the parties to attend a legal conciliation.

The conciliation process assists each party to identify the relevant issues and assists with identifying any settlement terms in an attempt to reach a mutually beneficial resolution.

The terms of the conciliated agreement are then recorded in a legally enforceable and binding deed of settlement.

The conciliator is not there to act as a judge, but rather to help the parties reach a resolution.

Legal Debt Recovery – Arbitration

Arbitration is a type of alternative dispute resolution which is outside of the courts and allows the debtor and the creditor to obtain a legally binding determination.

Arbitration is only available in certain circumstances and in certain types of matter such as any trade transaction for the supply or exchange of goods or services; banking; carriage of goods or passengers by air, sea, rail, or road; commercial representation or agency; construction of works; consulting; distribution agreement; engineering; exploitation agreement or concession; factoring; financing; insurance; investment; joint venture and other forms of industrial or business cooperation; leasing; or licensing.

More can be found in Section 1 of the Commercial Arbitration Act 2013 (QLD).

Legal Debt Recovery – Adjudication

If a building and construction debt dispute arises under the Building Industry Fairness (Security of Payment) Act 2017 (QLD) (“BIFA”) then BIFA includes the option of having the building and construction debt dispute adjudicated by an adjudicator.

A BIFA adjudication is a cost-effective and faster method of resolving debt disputes in the building and construction industry.

Once the adjudicator has decided, they will issue an adjudication certificate which can be registered as an enforceable money order in the Court and enforced.

Strict time limits apply to debt claims in the BIFA, so it is very important that you act quickly.

Read more about making payment claims – How to Make a BIFA Payment Claim

Read more about making adjudication applications – How to Make an Adjudication Application.

You can also seek a judicial review of the adjudication decision in the Court.

If you are unable to get a resolution with alternative dispute resolution, then you will have to take legal debt recovery action in Court.

Commencing Proceedings to Obtain a Money Order

A debt dispute in Court is commenced by drawing, filing, and serving a claim and statement of claim.

The statement of claim outlines all of the relevant material facts of your case which you may later need to support with evidence.

Once drafted and filed, these documents will need to be served on the debtor.

Service of the Process

Once filed you will need to serve the defendant with the claim and statement of claim.

For an actual person, we use a process server to serve all of our documents at a cost of around $120, depending on how easy or difficult he tries to be.

For a company, the Corporations Act allows a creditor to serve the documents by post.

Once served, he/they will have 28 days in which to file and serve a defence.

Next Steps

There are a number of steps which are taken in this legal debt recovery process.

These steps are governed by the Uniform Civil Procedure Rules 1999 (Qld).

The steps include:

1. Applying for default judgment or summary judgment.
2. Debtor drafting a defence and counterclaim (if any).
3. Drafting a reply to the defence and an answer to the counterclaim.
4. Disclosure and discovery of evidence.
5. Settlement Conference or Mediation.
6. Proceeding to a trial.
7. Legal costs in litigation.

We will briefly touch on these steps below.

Applying for Default Judgment or Summary Judgment

Default judgment – If the debtor does not file a defence within the requisite time (28 days) then the debtor can apply for a judgment in default.

This will be judgment for the full amount, plus the scale costs, plus interest.

Summary Judgment – If the debtor does file a defence, but there is no defence to this matter then the creditor can apply for a summary judgment if the court is satisfied that:

1. the defendant has no real prospect of successfully defending all or a part of the plaintiff’s claim; and
2. there is no need for a trial of the claim or the part of the claim.

Summary judgment is a lot harder to get and will only be given in the clearest of cases.

This application is before a Magistrate / Judge and requires an oral hearing.

However, if the creditor is successful then they can seek some costs of this application paid by the defendant. If the creditor loses then they may have to pay the defendants’ costs of the application.

Debtor Drafting a Defence and Counterclaim

Defence – The defendant may defend this debt claim by drawing, filing, and serving a defence to the claim. A defence basically admits, does not admit, or denies – all of the material facts contained in the statement of claim.

These non-admissions and denials are also to be supported by a reason for the non-admission and denial.

Counterclaim – A creditor should be aware that the defendant may also file a counterclaim, being a claim that the defendant alleges to have against the creditor.

This will need to be defended by way of an ‘answer’.

Drafting a Reply to the Defence and an Answer to the Counterclaim

Reply – If the defendant debtor does file a defence and the defence is a valid one, then the creditor will be unable to apply for judgment and you will need to draft and file a reply to the defence.

Answer – If the defendant files a counterclaim, then the creditor plaintiff will need to draft an answer to the counterclaim. This is essentially a defence to their counterclaim.

At this point pleadings are closed and the parties will proceed to disclosure / discovery.

Disclosure and Discovery of Evidence

Disclosure – If a creditor is unable to get judgment early then the matter will proceed toward a trial. The first step in proceedings after the close of pleadings is disclosure.

The creditor will be required to disclose all of the material that it intends to rely on as evidence to the defendant, and in turn, the defendant is to disclose to the creditor all of the material they intend to rely on as evidence.

There are a lot of rules around evidence, so there are some things that we need to do correctly (expert evidence for example (if required)). Once disclosure has been completed, the matter must be listed for a settlement conference or mediation.

Settlement Conference or Mediation

Settlement Conference – A settlement conference is a meeting convened by the registrar at the Court and is a final attempt to encourage the parties to settle the dispute prior to getting a trial date.

The settlement conference is a pre-requisite to getting a trial date in the Magistrates Court.

Mediation – In the District Court and Federal Courts, the parties may also be required to participate in a compulsory mediation prior to the trial.

Proceeding to a Trial

Trial – If the matter does not settle at the settlement conference or mediation, then the matter will be listed for a trial.

It is always best commercially to try to resolve these matters before the trial stage, and a large percentage of matters actually do resolve before trial.

Legal Costs in Litigation

Costs – It is the general rule that the loser in litigation has to pay the costs of the winner.

However, these costs will never repay the winning party 100%, which is why it is usually better to settle debt disputes before legal debt recovery action is commenced.

A standard costs order can be between 60% and 70% of actual costs spent, while an indemnity costs order can be around 80% to 90% of actual costs spent.

Obtaining a Judgment / Money Order

The purpose of legal debt recovery proceedings is to get a judgment / enforceable money order, which can be enforced over the property of the debtor.

A money judgment, a registered adjudication certificate, a registered QCAT decision – are all enforceable money orders and are able to be enforced.

Rule 793 of the Uniform Civil Procedure Rules 1999 (Qld) defines this and 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.

Schedule 3 of the UCPR says:

“order” … includes a judgment, direction, decision, or determination of a court whether final or otherwise.

Once you have this enforceable money order, and the debtor still will not pay, then you will need to enforce the judgment / money order.

Enforcement of the Money Order

Once you have an enforceable money order, there are a number of ways to enforce it, including:

1. Enforcement through the Courts; or
2. Enforcement with insolvency.

We will explain these in more detail below.

Enforcement through the Courts

A judgment creditor can enforce the judgment through the Courts. This can be done by applying for an enforcement warrant.

There are a few different enforcement warrants / orders that can be made, including:

1. Enforcement warrants for seizure and sale of property.
2. Enforcement warrants for redirection of debts.
3. Regular redirections from financial institutions.
4. Enforcement warrants for redirection of earnings.
5. Order for payment of order debt by instalments.
6. Enforcement warrants for charging orders.
7. Enforcement warrants for appointment of a receiver.

Not all warrants apply in every debt dispute, so it is important to obtain legal advice.

The most common are warrants for seizure and sale of property, redirection of debts, and redirection of earnings.

Enforcement Warrants for Seizure and Sale of Property

An enforcement warrant for seizure and sale of property is a warrant issued by the court authorising the Court bailiff to seize property of the enforcement debtor, and auction is to recover money to pay the money order.

This can include all real and personal property of the enforcement debtor.

The best property to seize is real property. If the debtor has a house, unit, or land, then there will usually be enough equity in this real property to satisfy the judgment and the costs of enforcement.

Check out our article – Enforcement Warrant for Seizure and Sale of Property

Enforcement Warrants for Redirection of Debts

An enforcement warrant for redirection of debts allows the judgment creditor to enforce the money order over any debts owed to the judgment debtor by a third person.

The warrant confers the obligation on the third person to pay the debt to the enforcement creditor rather than the enforcement debtor.

This can include any trade-debts owed by the third-party to the enforcement debtor, and also includes any money held in the enforcement debtor’s bank account.

Check out our article – Enforcement Warrant for Redirection of Debts

Enforcement Warrants for Redirection of Earnings

An enforcement warrant for redirection of earnings allows the judgment creditor to enforce a money order over the salary or wages earned by the enforcement debtor.

An enforcement warrant for redirection of earnings is a warrant directed at both the enforcement debtor and the enforcement debtor’s employer, ordering the enforcement debtor’s employer to pay part of the debtor’s salary or wages to the enforcement creditor.

When the Court issues the enforcement warrant for redirection of the enforcement debtor’s earnings, it needs to be served on the enforcement debtor and the enforcement debtor’s employer.

Check out our article – Enforcement Warrant for Redirection of Earnings

Enforcement Hearing & Statement of Financial Position

To gather all of the information that you require for an enforcement warrant, you may have to summon the enforcement debtor to provide financial documents and appear at an enforcement hearing.

A request for financial documents is done by issuing a Form 71 or Form 71A – Statement of financial position. This is a Court document where the enforcement debtor has to give full details about their financial position, including all assets and liabilities.

If they do not return this document, or the enforcement creditor is not satisfied with its content, then the enforcement debtor can be summoned to the Court to answer questions about their financial position. This is called an enforcement hearing.

The enforcement hearing is simply an information gathering exercise and used to gather the evidence required for the Court to issue an enforcement warrant. This can include:

1. Bank statements and all bank records.
2. Payslips and all employment records.
3. Details of all current assets including loan payout figures.
4. Any other relevant financial documents.

It is not compulsory, but an enforcement creditor will need this information to obtain an enforcement warrant.

Read this article – Enforcement Hearing & Statement of Financial Position

Alternatively, the enforcement debtor may choose to commence insolvency proceedings.

Enforcement with Insolvency

If the enforcement debtor is insolvent, then you may need to commence insolvency proceedings to attempt to enforce this debt.

If the enforcement debtor is a natural person, then you can enforce with bankruptcy.

If the enforcement debtor is a company, then you can enforce with winding up / liquidation.

We will explain these different options below.

Enforce a Money Order with Bankruptcy

If the enforcement debtor is a natural person, then the enforcement creditor can commence bankruptcy proceedings by issuing a bankruptcy notice.

A bankruptcy notice can be issued when:

1. The enforcement debtor is a natural person.
2. The enforcement creditor has a judgment or order from the Court of $10,000.00 or more.

If this is the case, then the enforcement creditor may apply for a bankruptcy notice at AFSA.

Once the bankruptcy notice has been issued, the enforcement creditor must serve the notice on the judgment debtor.

Once served the debtor will have 21 days to do any of the following:

1. Pay to the creditor the amount of the debt claimed; or
2. Make arrangements to the creditor’s satisfaction for settlement of the debt; or
3. Apply to set aside the bankruptcy notice.

If they fail to do any of these things within 21 days, then they have committed an act of bankruptcy allowing the enforcement creditor to file a creditor’s petition in the Federal Circuit Court seeking a sequestration order.

Once the sequestration order is made, a bankruptcy trustee will be appointed over the estate of the bankrupt, all of the bankrupt’s property (save for exempt property) will vest in the trustee, and the trustee will attempt to recover funds for the creditors.

Enforce a Money Order with Winding Up / Liquidation

If the enforcement debtor is a company (a Pty Ltd) then the enforcement creditor can commence the insolvency process by issuing a creditor’s statutory demand.

Once drafted, the statutory demand is served on the debtor company. Once served, the enforcement debtor will have 21 days to:

1. Pay the amount claimed.
2. Secure or compound for the debt.
3. Request that the demand be withdrawn; or
4. Make an application to the Court setting aside the demand.

If the debtor company does not do any of those things, then it is presumed to be insolvent. With this legal presumption of insolvency assisting, the creditor can make a winding up application to the Federal Court for an order that the debtor company be wound up in insolvency.

Once the winding up order is made, a liquidator is appointed over the company and will attempt to recover money to pay creditors.

Read our article – Statutory Demand – Complete Guide

Legal Debt Recovery

The legal debt recovery process can be expensive and lengthy in some circumstances.

When dealing with any reasonable creditor, the best course of action is usually to get the matter settled before commencing legal debt recovery action.

For unreasonable debtors, the creditor can commence legal debt recovery action, obtain an enforceable money order, and then enforce the money order.

Legal Debt Recovery FAQ

What are the time limits on debt recovery claims?

You must commence legal action within six (6) years from the date of the non-payment. You will be unable to commence legal action to recover the debt after that time, and you will lose your rights.

What are debtors and creditors?

A debtor is a person who owes money to a creditor. A creditor is the person who is owed money by a debtor.

What are letters of demand?

A letter of demand is the first step in the negotiation process. It will usually outline the creditors legal position and make a demand for the money owed.

Who determines minor debt disputes?

In QCAT it is a tribunal member. In the courts is will be a Magistrate or a Judge.

How are debt recovery matters dealt with by the court?

Debt recovery matters are mostly breach of contract matters. They are dealt with just like any other commercial or civil dispute. The process is identical.

How long will it take to collect my debt?

It really depends. If the debtor is reasonable, it may take a few weeks. If the debtor is unreasonable, then the matter could proceed all the way to a trial and take 18 months or more.

How does a business recover debt?

As above, a business can recover debts by alternative dispute resolution (including negotiation). If the matter cannot be settled, then the matter will proceed to Court. If the debtor still does not pay after judgment, then the judgment will need to be enforced.