As part of safeguarding the cash flow of your business, it must be able to collect most of its “bad debt”. Typically, we refer to “bad debt” as debt that is outstanding for longer than 90 days. One way to protect your business against bad debt early on is to review your contracts, trade agreements, and terms of trade. We can support you to ensure your terms are clear and processes solid so as to circumvent lengthy and expensive litigation proceedings in the future.
The Process of Recovering bad debt
Even where a business has excellent contracts and trade agreements in place, it will likely still frequently find bad debt on its books. Fortunately, there is a well-established debt collection legal process in place.
The first step in recovering debts owed to your business is to send a Letter of Demand to the debtor. For this letter to be legally admissible, it must include: precise details of the debt, a request that payment be made by a certain final payment date (typically 14 days), and notice that debt recovery options will be pursued in the event that payment has not been received by this date.
In the event that payment is not made after the Letter of Demand has been received and before the final payment date, then the second stage in debt recovery is to issue court proceedings. The court proceedings are typically initiated with the filing of a Complaint which sets out the factual scenario in what is usually referred to as a Statement of Claim. The sum and nature of the debt will determine which Court handles your matter and what the requirements of the accompanying paperwork are. You should seek legal advice at this step.
From here, it is the defendant’s response to your Complaint / Statement of Claim that will decide your next move. Most businesses’ claims for debt recovery under $100,000 will be determined in the Magistrates’ Court of Victoria. In the Magistrates’ Court of Victoria, the defendant has 21 days from when they received the Complaint in which to file a Defence with the Court. If, within this 21 day period, they do not file a Defence, do not pay you, and do not enter into a payment instalment plan with you, then you can get a Court Judgment / Order against them without even having to go to a Court Hearing (an “Order in Default of Defence”).
Once you have a Court Judgment / Order against them, the Court has a range of options available to proceed with actually collecting your money. These include:
Seizing property – where the debtors goods are seized and sold at auction
Selling Real Estate
Summons – where the debtor has to attend a public Court examination to explain their assets and liabilities
Garnishee Order – where a percentage of their wages are given to you
Bankruptcy/winding up proceedings
With our strong experience in debt recovery, we can help you at any stage of recovering a business debt. Our familiarity with the process of enforcing court judgment means that, should it come to it, we can manage the process right through to bankruptcy or the winding up of a company.
In line with our firm’s approach, we are well versed in the costs of court litigation and can advise you realistically on whether it is viable to proceed to Court.