There is no doubt that the ongoing COVID-19 pandemic continues to financially impact small businesses. Not getting paid on time by debtors can severely impact a business’s cashflow as well as their ability to strive during uncertain economic times. In this article, we explore certain legal avenues your business can take to recover the business’s debts.
1. Good faith negotiations with the debtor
Negotiating with the debtor should always be the first step, especially as we find that most businesses want to maintain an ongoing commercial relationship with the debtor. Negotiating, especially in relation to a bad debt, may involve parties agreeing or settling the debt in good faith on more favourable terms than could have otherwise been achieved if the debt was pushed through court proceedings. These terms could include a deferred payment structure or payment by instalments.
It is recommended to always refer to the Contract between the parties (if any), which may outline the steps that the parties should take to settle the debt. Therefore, it is always our advice to document any agreements in writing to prevent such disputes.
2. Letter of Demand
If negotiations fail, the next step is to issue a Letter of Demand. A Letter of Demand is a formal written request to the debtor to repay the debt. It puts the debtor on notice to repay the debt within a certain period, failing which the creditor reserves the right to take legal action.
Our Commercial Lawyers can assist with drafting and issuing a Letter of Demand to the debtor on your behalf.
3. Statement of Claim
If the Letter of Demand fails to recover the debt within the specified time, the next step may be to commence court proceedings. The jurisdiction in which proceedings can be commenced will depend on the amount of the debt. For example, in NSW, the NSW Local Court deals with claims up to $100,000, while the NSW District Court and the NSW Supreme Court deal with claims over $100,000.
Debt recovery proceedings are commenced by filing a Statement of Claim, which is filed by or on behalf of the creditor (known as the Plaintiff), against the debtor, (known as the Defendant).
Once filed and served, the Defendant has 28 days to file a Defence to the Statement of Claim. If a Defence is not filed within 28 days, the Plaintiff can apply for a Default Judgment, which is enforceable without the matter being heard by the court.
4. Creditor’s Statutory Demand
A creditor may choose to recover the debt by issuing a Statutory Demand under section 459E of the Corporations Act. Unlike a Statement of Claim, a Statutory Demand can only be validly issued if:
- it is in writing and strictly complies with the prescribed form;
- the debtor is a company and not an individual; and
- it is for debt(s) of at least $4000 against the debtor company.
The debtor will have 21 days to comply with the Statutory Demand, after which the creditor may make an application to the NSW Supreme Court or the Federal Court of Australia to commence winding-up proceedings (insolvency) against the debtor company.
Engage an experienced Commercial Lawyer
Given the complexities involved with business debt recovery, it is important to seek expert legal advice from the outset to ensure your business is protected. Ivy Law Group’s experienced Commercial Lawyers have assisted many businesses with debt recovery, from negotiating on behalf of our clients to representing them in court. Contact us today on (02) 9262 4003 for an obligation-free consultation or submit an online enquiry.
