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It’s a tough time for Australian businesses. This is evident by the uplift in insolvencies, approximately 1,100 insolvencies occurred in March 2024 – the highest monthly figure since 2015[1]. Now more than ever, it is crucial for businesses to implement effective debt recovery practices to maximise cashflow.

Debt recovery is a complex and time-sensitive process that can be difficult to navigate. DebtPol Recoveries and Macpherson Kelley have partnered to offer mercantile debt recovery services, credit control and insolvency advice, and debt recovery litigation to a range of businesses.

In this article, we step through the various debt recovery options which may be available to your business. Many of the steps taken from here will depend on your circumstances and available options, which Macpherson Kelley can help you navigate.

Pre-litigation

Letters of demand

The most common first step in collecting a debt is to send a letter of demand to the debtor. This is the first step to attempt to secure repayment and determine the willingness of the debtor to pay the debt owed.  It also sends a message to say that the matter has been escalated.

A letter of demand written by an external third party, such as your debt recovery agent or lawyer, is often taken more seriously by the debtor than letters sent by the creditor alone. Additionally, a detailed letter of demand will assist to persuade the debtor to pay or allow you to move swiftly to court proceedings if needed. A good letter of demand should clearly state that you intend to take legal action if the debt is not paid and set out the date by which you expect them to pay the debt.

Courts consider that sending a letter of demand is an essential precursor to commencing proceedings.

Creditor’s Statutory Demand for Payment of Debt

In some circumstances, if the debtor is a company, and there are concerns regarding the company’s solvency, the Corporations Act 2001 allows creditors to issue a formal demand called a Creditor’s Statutory Demand. A company typically has 21 days in which to act from the date the Creditor’s Statutory Demand is delivered. Consequently, if no action is taken within those 21 days, a presumption of insolvency automatically arises which can be relied on to wind up the company.

Whilst a Creditor’s Statutory Demand is not strictly a tool which can be used to recover debts, they can be a very powerful mechanism utilised by creditors to enforce their rights against the debtor. Statutory Demands are technical documents which must be issued correctly and satisfy a number of relevant legal requirements, or the court may deem it to be invalid (with the risk of a costs order against the creditor).

Before considering whether issuing a Statutory Demand is right for your business, you should seek legal advice.

Negotiation and Alternative Dispute Resolution

At any stage of the debt recovery process, there may be benefit in exploring alternative dispute resolution mechanisms such as negotiation, mediation, or arbitration to obtain payment, particularly if there is a dispute. Depending on the quantum of the debt owed, the relationship your business has with the debtor, and a range of other factors, it may be advantageous to negotiate a payment plan or try to reach an early settlement.

Most solvent debtors will ultimately want to avoid a judgement being made against them in court as this will appear on their credit rating and can have adverse consequences to their business.

We can advise your business on a commercial resolution, and if appropriate, assist you to negotiate and formalise a settlement agreement.

Litigation

If recovery attempts have been unsuccessful, creditors may consider commencing recovery proceedings in a court or tribunal. The quantum of the debt owed will dictate which court you use.

In Victoria, the Magistrates Court has jurisdiction to handle claims for debts up to $100,000. Once a claim is initiated, a Complaint is served on the debtor, who then has 21 days to pay the debt or choose to defend the matter. If the debtor does not respond within 21 days,  default judgment can be entered against them.

Claims for higher debt amounts can be issued out of the County or Supreme Courts.

If the proceeding is defended, or an agreement is not reached, Macpherson Kelley the matter can be progressed to mediation, and if applicable, to a final hearing.

Enforcement of Judgment

After receiving judgment, the debtor must pay the ordered amount (inclusive of legal costs according to the Court’s scale and statutory interest). Should the debtor fail to do so, enforcement steps can be taken by the creditor. Depending on whether the debtor is a company or an individual, the creditor may consider taking one or more of the following enforcement steps:

• Summons for Oral Examination (which can assist creditors to better understand the financial position of an individual or company prior to pursuing further recovery steps);
• Issuing Bankruptcy Notices and Creditors’ Petitions (where the debtor is an individual), which may result in bankruptcy of the individual;
• Creditor’s Statutory Demands and issuing Winding Up Applications (where the debtor is a company) which may result in a liquidator being appointed and the company being wound up in insolvency;
• Appointment of controllers or receivers (where the debtor is a company and the creditor is secured);
• Attachment of Earnings (where the debtor is an individual);
• Attachment of Debts; and
• Warrants to seize property and land.

The teams at Macpherson Kelley and DebtPol Recoveries have a wealth of experience in dealing with difficult debtors, improving credit management systems and processes, reviewing terms and conditions of trade and advising on personal guarantees.

To find out more about the debt recovery process and how DebtPol and Macpherson Kelley can help please contact Baris Kelecioglu of DebtPol Recoveries or Nathanael Kitingan of Macpherson Kelley.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.