Debt Recovery :
9 Key points to know in relation to the Debt Recovery Process
The need for Debt Recovery is something nearly all small businesses are faced with at one time or another. Businesses are at times reluctant to engage in debt recovery process because of the lack of transparency in this area. This article breakdown the steps involved in the debt process to give business owners greater clarity and certainty relation to the process involved.
1. Need for Business Trading Terms
It is important for any small business to ensure that its debts are legally enforceable. The legal enforceability of a debt often falls on whether a businessâ€™s trading terms are in correctly drafted and therefore legally enforceable. In view of this it is recommend that (a) that a small business does have actual trading terms in place and (b) that these trading terms have been reviewed by a lawyer to ensure that when debts arise from same they can be enforced by the business owner.
2. Reminders to Debtors
The Debt Recovery process should begin for a business before the involvement of a lawyer. The first step is for a business to implement a reminder process for its debtors. This may entail weekly letters or emails sent directly to a debtors – advising and/or reiterating that an outstanding debt requires payment. These reminders should also include reference to the businessâ€™s trading terms, the potential for interest accrual on the debt and for final notices potential of legal action if debts are remain unpaid.
3. Reminders Ignored time for Escalation: Letter of Demand
If reminders are ignored by a debtor it is recommended that you engage a lawyer to draft and send a letter of demand (LOD). A properly drafted LOD should: (a) enclose copies of relevant documents in relation to the debt (ie. Invoices sent, a copy of your business trading terms and copies of any other correspondence relevant to the debt) (b) Provide a brief overview of the work completed in relation to the debt (c) provide the legal basis for enforcing the debt ie. The legally binding relationship that exists as a consequence of your trading terms and/or any contract that may be in place. In contract to the reminder notices sent by your business an LOD often holds a lot more weight. This is often about perception. Whilst reminder notices may threaten legal action, the prospect of legal action is often not taken seriously until comes in the form of an LOD as provided by a lawyer on the law firms letterhead. In our experience the message conveyed in an LOD is often enough for a Debtor to pay the debt in question.
4. Commencing Legal Action
If following a letter of demand a debtor still fails to pay the debt a claim can be issued in the appropriate Court. The relevant Court is generally determined by the amount of the debt being claimed. In Victoria for instance if the debt is under $100,000.00 the matter will be heard by the Magistrates Court. If the debt amount exceeds $100,000.00 amount it may be heard in the County Court or even Supreme Court. Whilst there are slight variations in the Court process from State to State â€“ the process is essentially the same across Australia.
5. Statement of Claim
When lodging the claim in Court the particulars of the claim must be provided in a document called a Statement of Claim (SOC). The SOC will outline the basis of the claim and may reference the relevant documents pertaining to your claim (ie. Your business trading terms, invoices sent etc). The SOC will conclude with the total amount of debt being claimed together with any legal costs you may claim. The legal costs you can claim against a Debtor will often be determined by a Court Scale. The lawyer drafting your SOC will include this costs amount in your SOC. Once the documents have been filed with the Court (your lawyer can do this by post, in person or online) the Court will stamp and seal the documents and return them to your lawyer. Upon receipt of the sealed documents your lawyer will then arrange for service of the documents on the Debtor.
6. Service on the Debtor
Depending on whether the Debtor is an individual person or a Company the method of service will differ. If the Debtor is a Company then service can be effected by your lawyer by simply by posting the claim documents to the Companyâ€™s registered address. However if the Debtor is an individual the documents will need to be served on the Debtor personally. This personal service is generally done by a process server (engaged by your lawyer) who will take the documents and server them on the debtor at their residential or business address. Upon being served the Debtor will have a set period of time to respond to the claim OR they may choose to ignore the claim. If the Debtor choose to respond to the claim the debtorâ€™s options are: (a) pay the debt in full (b) come to some other arrangement financial arrangement acceptable to your business (c) or the Debtor can file a Defence with the Court disputing some or all of the debt in question. If the debtor chooses to ignore the claim then your lawyer can lodge default judgment in Court against the Debtor.
7. Default Judgment
If the claim is ignored by the debtor your lawyer can apply for default judgment with the Court. The Default Judgment can be heard by the Court without the Debtor (defendant) being present. The default judgment will include orders by the Court for the Debtor to pay the debt and pay any legal costs it sees fit to award in the circumstances. Often the above can mean the end of the disputed process. Many debts are not disputed and the outcome is your business has a judgment to enforce the debt for limited cost.
8. If the Debtor chooses to defend the matter
If the Debtor chooses to defend the matter the next step in the process is generally for the Court to direct you and the debtor to attend a Pre-Hearing Conference. A Pre-Hearing Conference is essentially the same as a mediation. A Court Registrar is normally appointed to effectively act as the mediator. The Pre-Hearing Conference is an opportunity for you and the Debtor to put your respective points of view in relation to the debt forward. In our experience more than 80% of these Debtor matters resolve at the Pre-Hearing Conference stage. However, if the matter does not resolve the matter may go to trial. At a trial the presiding Judge or Magistrate will ultimately determine the outcome in relation to payment of the debt. Further to the above it should be noted that at all stages of the Court Process the parties of a debt dispute are entitled to negotiate a settlement so to bring an end to any Court Proceedings.
9. If the Debtor Refuses to Pay
If upon obtaining a settlement, default judgment or judgment against the debtor and the debtor still refuses to pay you have a number of options in relation to recovering the debt. These options include (a) an examination summons or (b) a writ of execution against goods or land. If these measures fail then you can pursue bankruptcy against an individual debtor or liquidation and winding up of a debtor company.
Pursuing a debt through the Courts can be an involved and trying process. In view of this we recommend that you instruct a lawyer with experience to give the requisite advice in relation to any debt and assist you with its recovery.
By Tom Oâ€™Brien
Tom Oâ€™Brien is the principal lawyer of Oâ€™Brien Law. Tom has worked as a business and commercial lawyer for more than 10 years. Tom has had extensive experience acting on behalf of individuals and businesses in relation to debt recovery. To contact Tom please telephone 0428 436 547 or send an email to: firstname.lastname@example.org (www.obrienlaw.net.au)
Disclaimer: this article is not meant as legal advice but only as a guide to the Debt Recovery Process.