Providing credit to customers can often be seen as an advantage to many business operators as more sales may be attracted as a result of providing customers with an added convenience. However, the negative implications and repercussions can often lead to adverse task of recovering bad debts.
In order to avoid the likelihood of bad debts occurring, various practices and methods should be implemented. For example, stating the terms of trade and credit, conducting client credit checks prior to issuing credit, and keeping track of all your debtors. In the event of outstanding bad debts, listed below is a list of strategies that can be effectively used to retrieve amounts outstanding.
Credit Management Strategies
A sensible business practice in providing credit is to undertake appropriate measures to prevent the incidence of bad debts. These measures do not need to be complicated or overwhelming.
The following simple preventative measures will be a good start:
Conduct a credit check on new customers – this may include each customer completing an application for credit. A credit check may include business and personal details, credit references/guarantors, or a commercial credit check;
Ensure that your credit policy and conditions are clearly explained to your customers;
Ensure all agreements including the conditions of credit are made in writing and signed;
If practical, try to collect a deposit or pre-payment before making a supply. Alternatively you may collect progress payments to reduce the risk of bad debts;
Maintain your debtors’ account and make regular credit reports to highlight any due or overdue debts;
Implement a structured practice for following up overdue debts. In the first instance, this may involve making a phone call, visiting your clients or sending a polite reminder;
Continuously evaluate the credit rating of your clients; and
Remember: you are not obliged to provide credit to risky customers
If bad debts are still incurred after having implemented credit management strategies, you may recover the debts via the three following methods:
When a bad debt arises, it is in your best interest to contact the person who owes the debt and attempt to agree to the terms of the payment for the debt. You may also seek the assistance of Community Justice Centres to assist you in resolving any disputes.
Letter of Demand
If you are unsuccessful in recovering the debt by consultation, you may wish to issue a letter of demand to the person who owes you the money (including a company), requesting that they pay you the outstanding amount by a certain date. Either you or your solicitor can draw up a letter of demand.
The letter should state details of the debt and also warn the person that legal action will be commenced if they do not pay by the prescribed date. Before issuing a letter of demand, it is important that you evaluate the consequences of taking legal action. If you prefer not to send a letter of demand, a less formal letter requesting payment may be more appropriate.
The letter of demand may be later produced as evidence that you tried to recover the debt, if legal action is taken.
In the case where you are trying to recover a debt from a company, you may also issue a statutory demand, if you receive no response from your letter of demand. A statutory demand indicates that legal action is imminent if the debt is not paid within 21 days. Either you or your solicitor can draw up a statutory demand.
At this point in time, if the debtor does not respond to your written request/demand, you may consider taking legal action.
If you wish to recover your debt through legal proceedings, be aware that in some cases, the process may become complicated and you may seek legal assistance.
The type of legal proceeding will depend on the amount of the debt owed by the person. There are four main courts you may go to depending on the amount of the debt.
Debts up to $10,000 are dealt with the Small Claims Division of the Local Court
Debts between $10,000 and $40,000 are dealt with in the General Division of the Local Court
Debts between $40,000 and $750,000 are dealt with in the District Court
Debts over $750,000 are dealt with in the Supreme Court
Legal proceedings go through a number of steps:
Step 1: Statement of Claim To start a legal proceeding, you must first lodge a Statement of Claim at the relevant court (refer above). As a plaintiff, you will lodge a Statement of Claim against the person that owes you the money (known as the defendant).
A Statement of Claim is a document that outlines:
Who owes you the money;
How much money you are owed;
When and how the debt arose; and
How long they have to pay you back
In cases where a business owes you the money, it is required that you conduct a search to identify the business name, address, place of business and ABN (for companies). You may obtain this information from the Australian Securities & Investments Commission (ASIC) for companies and the Office of Fair Trading for other types of businesses.
You may also complete a Statement of Claim at any Court or ask your lawyer to prepare it on behalf of you. If you are lodging your Statement of Claim at the Local Court, you may access Statement of Claim forms from the NSW Local Court Website at www.lawlink.nsw.gov.au/lc.nsf.
Step 2: Serving the Summons Upon lodging your Statement of Claim, you will be issued a Summons that must be served to the defendant. A Summons is a court document, which informs the defendant that the plaintiff has sought a legal claim for a certain amount of money. It also demands that the debt be paid by a certain date.
Either the Sheriff’s Office or yourself may serve a Summons. If you choose to serve the Summons yourself, you should ensure that you serve the Summons correctly. As each Court may have different rules on serving a Summons, it is best to check on the correct procedure beforehand. A Summons should be handed to the person who is named in the document who owes the money, or in the case of a company, to the registered office. You may either post the Summons to the registered office of the business or hand it to an employee of the business. However, you can only serve the Summons to a person who is over the age of 16 years.
Once you have served the Summons, you may be required to provide the Court information on how and when the document was issued. This is usually done via an Affidavit of Service. You should ensure that you have proof that the Summons was issued.
Step 3: Legal Proceedings
Upon receiving the summons, the defendant may:
Ignore the Statement of Claim;
File a confession to the debt; or
File a defence to the debt
If after 28 days the defendant has not responded to the Summons with a confession/defence or has not made any payment, thus ignoring the Statement of Claim, the plaintiff may ask the Court to make a ‘default judgement’. Applying for a default judgement is simple and does not require a solicitor. The plaintiff is simply required to file an Affidavit of Debt (stating the amount owed). In this case, the Court will normally decide a verdict in your favour without a court appearance.
The defendant may file a confession to the debt and request to pay the amount by instalments. If the Registrar of the Court makes an instalment order, the plaintiff is given the opportunity to either accept or reject the offer. If the plaintiff rejects the offer or the Registrar refuses to make an instalment order, then there is a hearing as to what the payment should be.
If the defendant believes that they do not owe the money or does not agree with the amount of the debt, a defence may be filled with the Court. As well as filing for a defence, the defendant may file for a cross claim at the same time, if the wish to raise a claim against the plaintiff or any other person.
Upon filing for a defence/cross claim, the Statement of Claim, defences and cross claims are filed together and refereed to “pleadings”.
Claims of less than $10,000 that are dealt with in the Smalls Claims Division of the Local Court have now been simplified. A solicitor is not necessary for the hearing. A ‘pre-trial review’ is first conducted to try to negotiate a settlement between the two parties. If no agreement is made between the two parties, then a hearing is automatically scheduled to decide the matter. Generally, the hearing does not involve parties giving oral evidence. Rather the court directs parties and their witnesses to provide written statements and a decision is made based on the evidence in the statements.
Claims larger than $10,000 generally require a more formal procedure to be undertaken. There are several proceedings before a hearing and each party may be required to list and make available to the court all documentation in their possession or control and/or issue court orders (subpoenas) requiring third parties to produce specific documents to the court. Furthermore, in some cases, the court may also order each party to file statements or Affidavits.
Due to the complex nature of formal proceedings, it is advisable that you seek the assistance of your solicitor.
Step 4: Enforcing the Judgement
If you are successful in your legal proceedings, the next step is to enforce the judgement. In other words, take action to recover your debt from the debtor. This may done in the following ways:
Issue a writ of exclusion, whereby the Sheriff’s Office goes to the debtor’s address to demand payment;
Issue a writ against land, in the cases where a writ of exclusion is unsuccessful;
Issue a garnishee order to anyone that owes the debtor money. The order directs the garnishee to direct the money to the creditor;
Issue an examination summons, if little is known about the debtor’s financial position. This summons the debtor to go to a nearby court to have their financial position examined; or
Seek the debtor’s bankruptcy in the case of individuals or liquidation/winding up in the case of a company
Prescribed forms are required for enforcing the judgement. These are available from the Court, or the case of the Local Court, from their website at www.lawlink.nsw.gov.au/lc.nsf.
Legal proceedings may be both complex and costly. Various costs are likely to arise at every stage of the legal process, including costs relating to your solicitor and services to the Sheriff’s Office. Consult your Local Court for information pertaining the various costs that may be incurred.
More Information: Contact a legal adviser
Disclaimer: This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in this article is for guidance only and should not be relied upon without obtaining professional advice having regard to your specific circumstances.
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