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What are the Legal Options if Your Business is Owed Money?

What are the common situations when a business is owed money?

Ordinarily a business can be owed money because they have provided goods or services and have not been paid. Alternatively a business may have loaned money, and the money has not been repaid.

What steps can be taken prior to seeking legal advice?

A business should communicate with the customer to try and ascertain if there is a genuine dispute about the debt, or if the customer is not paying because of their own cash flow or liquidity problems. 

A business should take steps promptly. Our experience shows that the older the debt, the harder it is to recover.

The best approach is a telephone call to try and engage the customer. If the customer is ignoring telephone calls, we recommend sending an email to create a paper trail. 

If there is a dispute, try and get as many details as possible as to the basis of the dispute. This will enable the business to consider whether the dispute is genuine.

If the debt is agreed, but there is an issue as to cash flow, the business may be able to agree to repayment by instalments with certain terms such as the payment of interest.

What will a lawyer need to know when you are seeking legal advice?

The first thing the lawyer will ask you is if there is a written contract or agreement for the supply of goods or services, or the loan.

This can include a purchase order, sales agreement, terms and conditions, tax invoice, loan agreement or emails which evidence the terms of the agreement.

An agreement does not have to be in writing to be legally enforceable, but if it is in writing, it does make the process of proving what the terms and conditions of the agreement are much easier.

It is important to know precisely the person, company, or entity that owes the business the money and their contact details so that the lawyer can communicate with the correct person or entity.  If it is a company, you will need the ACN.

What is the legal process for attempting to recover the debt?

The first step is to send a letter of demand, setting out the details of the claim and demanding payment with a specified period of time. Often the issuing of a letter of demand causes a debtor to take the debt seriously and make payment.

If a debtor does not respond to the letter of demand, the next step is to commence court proceedings. The desired outcome of commencing court proceedings is to obtain judgment, either by default or after a defended hearing.  Prior to commencing proceedings, the business should be satisfied that the debtor has the capacity to pay any judgment ordered against it.

What is the difference between a Statement of Claim and Statutory Demand?

A Statement of Claim is the document which commences court proceedings. The company/business/individual who is owed the money is referred to as the plaintiff and the  company/business/individual who owes the money is called the defendant. The value of the debt determines if the proceedings are in the Local, District or Supreme Courts. Most debt recovery is in the Local Court, which has a jurisdictional limit of $60,000.00.

Once the Statement of Claim has been filed, it must be personally served on the debtor by a process server or delivered to their ordinary place of residence and left with a person over the age of 16 years.  The Court process then depends upon the response.

If the debtor does not respond within 28 days of service by filing a Defense, a plaintiff can seek default judgment.

If the claim is defended it may proceed through the process where parties are requried to file affidavits containing their evidence and the claim is listed for hearing before a Judge.

A business may consider a statutory demand if the debt is owed by a company and there is no genuine dispute about the debt or offsetting claim. A statutory demand is a demand made to a company by a creditor under Section 459E of the Corporations Act. The debt must be greater than the statutory minimum, which is currently $4,000. The demand requires the debt to be paid within 21 days.

If a company fails to comply with a statutory demand it is presumed to be insolvent. The most common ground for winding up a company is a declaration of insolvency, which will be made if a creditor demonstrates that the company has failed to comply with a statutory demand.

What steps can a business take to try and avoid problem debtors?

The business should consider whether it is appropriate to request deposits or advance payments to be held on trust prior to providing the goods or service. 

All agreements should be in writing and preferably signed by all parties.

Businesses should collect as much information as possible from the customer which may assist if there is a need for debt collection in the future such as bank account, assets, employers.

Kristy Nunn is a director of the Dispute Resolution & Litigation Group at Mullane & Lindsay. Mullane & Lindsay have extensive experience in professional negligence claims.

Liability limited by a scheme approved under Professional Standards Legislation

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