Debt recovery

It’s important that directors and companies are aware of their rights and obligations during the debt collection process when they’re exposed to legal action and enforcement. But what types of notices should companies seek advice about? And what are the consequences for a company that can’t pay its debts?

Here are some of the primary corporate debt recovery options:

Letter of demand

Typically the first step in a creditor’s arsenal of debt collection weapons, a ‘letter of demand’ sets out the debt a company owes to the creditor and demands payment. Payment must be made within a tight timeframe. If it’s not, the creditor can take the matter to court.

A creditor can also rely on a letter of demand in court proceedings to prove their 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 not taking legal action.

Statement of claim

If a letter of demand and negotiations are unsuccessful in securing payment of a debt, the next step of enforcement is court action against the company. This is done by filing an originating process or a ‘statement of claim’.

A statement of claim pleads the case against the defendant and seeks 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, this is set out 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, including:

• Writ of possession for land (Supreme or District Courts)
• Writ of delivery for goods
• Examination summons where the director of the judgment debtor may be summoned to answer the Court’s questions about company assets and how the company can satisfy the judgment, as well provide documents evidencing the company’s financial circumstances.
• Writ of execution where 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 don’t succeed, the creditor may wish to commence winding up proceedings against a company.

Statutory demand: winding it up

While obtaining a judgment debt is prudent, a creditor doesn’t necessarily need to wait until it has obtained judgment debt against a company to take action. They 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 failure to pay a debt, except that it only applies to corporate debtors.

Statutory demands are known for being one of the most powerful business debt collection tools available to creditors. They’re issued by a creditor to a company under s 459 Corporations Act 2001 (Cth) (Act) and notify the company that if it doesn’t 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’s 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 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 & 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
• A statutory demand can’t 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 proceedings against the directors regarding the same alleged debt