Debt recovery for businesses

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Maintaining an effective system for recovering debts is essential to all businesses. Allowing unpaid debts to accumulate affects cash flow and can seriously impact the profitability of a business.

The first step in controlling debts is ensuring that contacts and terms of a service are clear and stipulate the procedure for payment of accounts. The phrase “prevention is better than cure” can apply to the account control practice implemented by businesses. Recovering debts via tribunals and courts can be a messy and expensive affair and therefore utilising an appropriate contract at the supply stage can significantly reduce the occurrence of bad debts. A well-drafted contract for goods and services will minimise disputes by clearly identifying the rights and obligations to both the supplier and consumer.

Key terms that should be included in contracts for goods and services are:

  • Accurate definitions of the goods or services that are being supplied;
  • The accepted time for payment;
  • The consequences of failing to pay on time;
  • Circumstances that may result in the ability for the parties to terminate the contract; and
  • Processes for the resolution of disputes or dealing with faulty goods or services.

Unfortunately even the most comprehensive contract will not keep a business impervious to bad debtors. Where non-payment of a debt occurs it is imperative that businesses have a procedure in pace to promptly initiate the debt recovery process. Lengthy delays make the recovery process more difficult as debtors assume that a creditor is not serious about recovery, or even worse, the debtor may be unable to be located due to relocation or entering into administration/bankruptcy.

The Recovery Process

Generally the first step to recovery is to issue a letter of demand. A well-written letter of demand can have the effect of procuring payment of the debt, and if successful, saves a creditor from further expenditure on legal costs.

Whether a letter of demand should be issued by a creditor directly or should be referred to a lawyer will depend on several factors including the amount and nature of the debt, the previous history of the debtor and the circumstances surrounding any dispute the debtor has raised with respect to payment.

A letter of demand should always clearly identify the exact amount owed and provide a reasonable date by which the debt should be paid. A letter of demand should be firm but under no circumstances should abusive or threatening language be included in the demand. If the letter of demand is ineffective the next step is to take legal action by making a claim for the debt. The venue of a claim for recovery and the processes involved will vary depending on the amount and type of the debt, as outlined in the following summary:-

Queensland Civil and Administrative Tribunal (QCAT)

  • Debt disputes and disputes between consumers and traders valued up to $25,000.
  • Is inexpensive and is more informal than a traditional court.
  • The process for making a claim is simplified and does not require professional legal drafting
  • Lawyers are generally unable to attend the tribunal hearings and a creditor must appear on their own behalf.

Magistrates Court

  • For disputes where the debt is up to $150, 000
  • A claim in the Magistrates court must be drafted according to the Uniform Civil Procedure Rules 1999 and it is advisable that legal advice be obtained.

District Court

  • For disputes that involve amounts more than $150,000 and less than $750,000.

Once a claim is filed in any of the above jurisdictions a debtor will have 28 days to file a defence, if the debt is disputed. If no defence is filed the creditor may apply to the Court/Tribunal for a Default Judgement. A judgement is a formal order by the Court/Tribunal that acknowledges that the debt is payable by the debtor to the creditor and can be enforced against the debtor by:

  • The registering of a writ or enforcement warrant against any property owned by the debtor; or
  • The seizure and sale of a property owned by the debtor; or
  • The deduction of money from the wages of the debtor; or
  • Forcing the debtor to attend at an “enforcement hearing” to answer questions and provide information about the personal financial situation of the debtor

Debts are an unfortunate reality that all businesses must deal with at some time, however the adoption of efficient practices and prompt action when accounts remain unpaid can reduce disputes and maximise prospects of recovery.

For more information contact Malcolm McColm at MMLaw.

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The content published in this Blog is in the form of academic papers and the opinions expressed herein are generalised. The information provided is for educational purposes, not specific legal advice.

The application of any principles referred to can alter from case to case and accordingly you should seek independent legal advice in respect of your individual circumstances.

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