DEBT RECOVERY - PROTECT YOUR CASH FLOW FACT SHEET
LAST UPDATED: 27 February 2014
Cash flow is important to any business. Unpaid accounts hinder cash flow, and precious time, money and resources are wasted chasing up debtors. Ensuring your business has the most efficient procedures available to recover unpaid accounts helps to ensure they can be recovered quickly and with minimum expense.
Solid terms and conditions for the supply of goods and services can give a business an effective tool to recover unpaid accounts. Terms and conditions should where appropriate provide:
- Guarantees of payment by third parties;
- The ability to charge interest;
- The ability to recover costs including legal costs;
- The ability for registration on the Personal Property and Securities Register.
The value of the goods or service (and related credit) being provided should dictate the detail of the terms and conditions. If the value is high, then terms and conditions should also provide for security over real property.
Even the most comprehensive terms and conditions will not always ensure payment of unpaid accounts. Debt recovery is an everyday occurrence for many businesses. Depending on the terms and conditions (if any) a business (creditor) has myriad of options to recover an unpaid debt.
LETTER OF DEMAND/OFFER
This is commonly the first step for any debt recovery. This can either be a letter demanding payment of the debt, or an offer for the payment of the debt on favourable terms for the debtor. An initial letter is often a precursor to legal action.
If the debt cannot be resolved by an agreement between the debtor and the creditor, the next step is usually to involve the courts. Depending on the size of the debt the matter can be heard in the Magistrates Court, County Court or Supreme Court. A common occurrence for debts under $100,000 is for the Magistrates Court to make an order in default of defence. That is, the application is made by the creditor and when the debtor fails to file a defence (as is often the case) a judgement is made in the creditors favour (judgement debt). If a judgement debt is made in a creditors favour legal costs incurred by the creditor are added to the debt.
Once judgement debt is obtained, a creditor has many options to recover the unpaid amount:
- If the debt is over $5000 a creditor can make an application to bankrupt the debtor. If the bankruptcy application is successful then the debtors assets will be divided between its creditors based on each creditors priority;
- If the debt is a company then an application can be made to wind up the company and have it’s proceeds distributed amongst the company’s creditors based on each creditors priority;
- If the debtor has personal property that the creditor believes could be sold to pay their debt, then a warrant can be issued to the Sherriff’s department to recover personal property that can be sold to pay the debt. If the debtor owns real property an application can be made to seize and sell the real property;
- If the debtor is employed and earning a salary, an application for an attachment of earnings order can be made to have a proportion of the debtor’s wages paid to be paid directly to the creditor from the debtors employer;
- If the debtor is owed money from another party (excluding wages) then an application can be made for an attachment of debt or garnishee order. This means that when the debtor receives the money they are entitled too, the court orders requires it be paid to the creditor.
The size of the debt and the type of entity of the debtor will dictate what debt recovery method is most suitable.
If you have a debt collection matter, or would like to discuss how to ensure your terms and conditions are adequate, contact the commercial team at Taits Legal on 03 5560 2100.