WHAT YOU NEED TO KNOW

If a creditor is owed money by a company, there are many ways they can seek to recover it.

Directors and companies should be aware of their rights and obligations in the event that debt collection processes are in full swing and the company is exposed to legal action and enforcement.

What types of notices should companies seek advice in relation to? What are the consequences for a company that cannot pay its debts as and when they fall due?
Here are some of the primary debt recovery options regarding companies.

Letter of demand

Usually, the first step in a creditor’s arsenal of debt collection weapons, a letter of demand sets out the debt which the company owes to the creditor and a demand for payment, usually within a tight time frame after which time the creditor can take the matter to court if the debt is not paid.
A creditor can also rely on a letter of demand in court proceedings to prove the creditor’s attempt to settle the matter before filing a claim. A debtor may respond to a letter of demand by paying the amount in full, seeking a repayment arrangement or negotiating a part payment in return for the creditor refraining from legal action.

Statement of Claim

If a letter of demand and negotiations are unsuccessful in securing payment of a debt, the next step on the ladder of enforcement is court action against the company by filing an originating process or a ‘Statement of Claim’.
The Statement of Claim pleads the case against the Defendant, seeking payment of the lump sum debt (sometimes referred to as a ‘liquidated claim’). For claims against debtor companies, be sure to identify the Australian Company Number (ACN) and the registered office of the company.
Once a Statement of Claim has been filed, the Defendant has 28 days to file a defence. If no defence is filed, the Plaintiff (who filed the claim) can seek a default judgment against the Defendant.
The debt amount dictates the court jurisdiction. In NSW, the various options are as follows:

  • Debts under $10,000: Small Claims Division of the Local Court
  • Debts between $10,000 and $100,000: General Division of the Local Court
  • Debts over $100,000 and up to $750,000: District Court
  • Debts exceeding $750,000.00: Supreme Court.

Enforcing a judgment debt

Once the creditor obtains a judgment debt (referred to as a ‘judgment debtor’), there are various methods of enforcement such as:

  • Writ of possession for land (Supreme or District Courts)
  • Writ of delivery for goods
  • Examination summons whereby the director of the judgment debtor may be summoned to answer the Court’s questions about how company assets and how the company can satisfy the judgment as well provide documents evidencing the company’s financial circumstances.
  • Writ of execution whereby the Sheriff can attend judgment debtor’s premises and seize and sell them with the proceeds going to the judgment creditor
  • Charging order which can apply to property such as stocks and shares in a public company, money on deposit in a financial institution or any equitable interest in the property (Supreme or District Courts)

In NSW, a judgment debt can usually be enforced for a period of up to 12 years after the date of the judgment (or such longer period if granted by a court). If standard debt recovery procedures do not succeed, the creditor may wish to commence wind up proceedings against a company.

Statutory Demand: winding it up

Whilst obtaining a judgment debt is prudent, a creditor does not necessarily need to wait until it has obtained judgment debt against a company to take action – it could simply seek to have the debtor company wound up by serving a Statutory Demand. Winding up a company is similar to filing bankruptcy proceedings against an individual due to the failure to pay a debt except that it only applies to corporate debtors.
Known for being one of the most powerful business debt collection tools available to a creditor, statutory demands are notices issued by a creditor to a company pursuant to s 459 Corporations Act 2001 (Cth) (Act) notifying the company that if it does not pay the debt, the creditor will apply to the court to wind up the company on the basis that the company is insolvent. The test for corporate insolvency is contained in section 95A of the Act – in short, if the company is unable to pay its debts as and when they become due, it is deemed to be insolvent.
A Statutory Demand allows the recipient or debtor company 21 days from the date of the demand to:

  • pay the debt in full; or
  • file an application in court to have the demand set aside on the basis of a genuine dispute.

The company is taken to have failed to comply with a Statutory Demand at the end of 21 days after the date of service. This means that ignoring a Statutory Demand can have grave consequences for your company. If the debt is not paid within 21 days and the company does not seek to have the demand set aside on the basis that the there is a genuine dispute about the debt (and the court has not extended the time for compliance), the creditor can lodge a winding up application and the court may appoint a liquidator to wind up the company.

Statutory Demands: other rules and processes

  • A Statutory Demand must correctly state the debtor’s name and registered office of the company, specify the exact debt amount and specify a place in Australia where the debt can be paid
  • The Statutory Demand cannot include a claim for unliquidated damages and the debt amount must exceed $2000
  • Service can be achieved by leaving the demand at the debtor company’s registered office, posting it to the registered office or by serving it personally on a company director who resides in Australia
  • Multiple creditors are not permitted to serve a single Statutory Demand on one company
  • A creditor must not serve a Statutory Demand at the same time as proceeding against the directors regarding the same alleged debt.

For more information on corporate insolvency review the resources below or contact us today.

CORPORATE INSOLVENCY KNOWLEDGE & ARTICLES

CORPORATE INSOLVENCY: AN OVERVIEW
A formal insolvency commences when a company is unable to pay its debts, prompting the appointment of an external administrator. Understanding the overall insolvency framework can assist you to lessen any financial and emotional impact as you move through the complex insolvency processes. The three most common types of formal insolvency appointments are Voluntary Administration, Liquidation and Receivership.

CREDITORS
Taking an interest in the liquidation of a company that owes you money may help you to secure a better financial return. Whether you’re an employee who is owed wages or a supplier seeking payment, here is an overview of the rights and obligations of creditors in insolvency.

CREDITORS’ MEETINGS
When a company goes into liquidation, the Liquidator will use a Creditors’ Meeting to communicate with the creditors about the progress of the liquidation and to seek approval or guidance from creditors. In the case of Creditors Voluntary Liquidation a creditors’ meeting is required to be convened within 11 days of the appointment of a liquidator.

DIRECTOR PENALTY NOTICE 
One of the most powerful tools wielded by the Australian Taxation Office is the ability to issue a Director Penalty Notice (DPN) against company directors for certain company debts including PAYGW and SGC. Serious implications flow from non-compliance with the ATO’s requirements it pays to be informed, upfront, lodge company statements on time and to maintain good order in the books.

EMPLOYEE ENTITLEMENTS SAFETY NET
When a Director is contemplating putting their company into liquidation, one of their biggest fears is that their loyal and hardworking staff won’t be paid their entitlements. Fortunately there is a government safety net that protects employee entitlements in these situations.

INSOLVENT TRADING
Insolvent trading occurs when a company is unable to pay its debts and continues to incur further debt. When a company is experiencing a cash flow or liquidity crisis, it is important that its directors and officers consider the company’s ability to pay all of its debts as and when they become due.

LIQUIDATORS’ RECOVERY ACTION
The Corporations Act 2001 (Cth) (Act) permits liquidators to recover certain transactions made within a set period before the commencement of a company’s liquidation. These transactions are known as “voidable transactions”.

CORPORATE TURNAROUND
Get a broad overview of the major steps in turnaround strategy. One of the major drivers for business insolvency is failure to challenge business models and take strategic action early. When businesses started to find themselves in a tight financial position it is vital that an appropriate turnaround strategy is implemented quickly.

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