Avoiding bad debtors
In all small businesses where credit is available to the customers, bad debtors are likely to arise. This is because people take both goods and services on credit before paying for them. Credit is usually provided to customers on agreed ‘trading terms’, which is generally monthly. The failure of these debtors to meet their commitments in accordance with the trading terms can often cause considerable anxiety for business owners. Bad debtors often create other problems for small business owners including problems with cash flow and the day to day running of the business.
To reduce bad debts there are some simple strategies that we can advise you about in relation to chasing the debt and setting up suitable arrangements for payment. If debts remain outstanding without any payments being made, it is important that you resort to legal remedies as quickly as possible to stay on top of your cash flow.
Debt recovery solutions
What can we do for you?
Our process is normally to issue a letter of demand to the customer (“debtor”), providing them with 7 days to pay the invoice in full otherwise proceedings will be commenced. In the event that the debtor does not respond to the letter of demand, then legal action should be commenced as soon as possible.
What legal action needs to be taken?
Different legal action will be recommended to you depending upon a number of circumstances.
- Statutory Demand: If the debtor is a company, and there is no dispute about the debt, we may recommend that a Statutory Demand be issued. A Statutory Demand will require the debtor to pay the debt within 21 days (or come to suitable arrangements with you for payment) or alternatively will be deemed insolvent and you would be capable of winding up the company and placing the company into liquidation. Further information about Statutory Demands is available here:
- Caveat: If your terms of trade include the right to register a caveat over the debtor’s property, this can be done once they are in default, to provide you with security for your debt. Having security puts you in a much better position than being an unsecured creditor, if the debtor becomes insolvent.
- Building disputes: Subcontractors, or people who provide goods to the Building and Construction Industry, can make a Payment Claim under the relevant Building and Construction Industry (Security of Payment) legislation. Further information is available here.
- Debt recovery proceedings: Debt recovery proceedings can be commenced in a court. The relevant court to commence proceedings will depend upon a number of factors, including the amount of the debt, and the location of the parties.
- Location: We will consider which State or Territory is the most appropriate jurisdiction to consider the matter. This will depend upon where you and your customer are located. Our firm can assist with claims in the ACT or NSW courts.
- Amount of the debt: If the debt is below $10,000.00 it is considered to be a small claim and will be considered in a different forum to debts above $10,000.00. The process for claiming small claims is generally different to claiming larger debts.
Claims below $10,000
How much will it cost me to recover a debt which is less than $10,000?
In the ACT, small claims proceedings are commenced in the ACT Civil and Administrative Tribunal (ACAT) which has a jurisdictional limit of $10,000.00. In these cases, the legal costs associated with proceedings are not recoverable however you can claim recovery of filing fees and any interest that may have accrued from the date of the debt.
If you are successful in obtaining a judgment in the ACAT, the next step is to enforce the judgment. Enforcement options include:
- Wage garnishee (earnings redirection order) – which is available if you know that the debtor is employed and who they are employed by;
- Writ on goods (seizure and sale of goods) – where the sheriff will be requested to attend the debtor’s premises to seize goods to the value of the debt;
- Oral examination – to ascertain the financial position of the debtor;
- Statutory Demand (for companies) – see above;
- Bankruptcy Notice (for individuals) – once a judgment has been obtained, you can serve a Bankruptcy Notice on the debtor which requires them to pay the debt within 21 days (or come to suitable arrangements with you) or alternatively you would be able to apply to the court to place them into bankruptcy.
Legal costs associated with enforcement action are often recoverable from the debtor. In these circumstances, the fees that we charge do not generally exceed the amount you can recover from the debtor.
Debts over $10,000 (ACT)
How much will it cost me to recover a debt which is more than $10,000?
To collect debts of more than $10,000, proceedings must be commenced in the ACT Magistrates Court, which has jurisdiction up to $250,000. In these cases the legal costs of issuing proceedings are recoverable, as well as filing fees and interest. It is difficult to give an accurate assessment in relation to costs as this will depend greatly on the outcome and whether the matter is defended by the debtor.
Ultimately, the cost of the matter will depend upon whether there is any dispute between the parties. If the debtor files a defence, costs can be significantly higher than an undisputed claim. We provide continued advice in these circumstances about how to resolve the dispute to minimise the costs that you incur. Contact us to discuss our fees for debt recovery matters over $10,000.00. These fees are usually comparable to the costs you can recover from the Defendant.
Please call Ashlee Berry today on 02 6280 8899 to arrange an appointment or to discuss your needs.