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Debt Recovery Process

Debt Recovery Process in New South Wales

Every business will faces the reality of clients or customers who refuse to pay. Why should you be treated as a bank? Remember, the squeaky wheel gets the oil. So sqeak!

Preliminary Debt Recovery Steps

Before you race off and mount an expensive court action, you ought to consider other, less adversarial ways of recovering the debt and possibly maintaining the business relationship. These include direct communication like calling the debtor and issuing letters of demand and alternative dispute resolution (ADR).

These preliminary steps are the foremost cost-effective ways of pursuing debt recovery in NSW. If these methods are unsuccessful, a creditor should think twice about the quantity of cash they're trying to recover before commencing court proceedings.

Direct Communication

Direct communication (whether by phone or email) are often an honest way of ascertaining why a debtor (the person or company that owes money) has not been ready to pay. Sometimes, all you have to do is communicate and negotiate a repayment plan. The debtor may be experiencing a sudden low period in their business.

However, you ought to not harass a debtor. If they fail to reply to polite inquiries, you'll have little choice but to proceed to court. That's when you get Sydney Law Solutions on the case. Remember, if successful at Court, you will recover your debt and seek an order that the other party pay your costs.

Alternative Dispute Resolution

ADR can also be an option for debt recovery in NSW if a debtor is willing to participate. One method of ADR is mediation whereby an impartial third party (the mediator) will facilitate negotiations between the parties. The parties got to reach a consensual agreement for mediation to resolve their difficulties.

The construction industry commonly uses adjudication to resolve debt disputes. this will often quickly and cost-effectively recover money owed under a construction contract. The adjudicator’s decision is binding and a court can enforce it if needed.

Letters of Demand

If communication doesn't yield a result and the debtor doesn't engage in ADR, then the next step is to issue a letter of demand. We can advise you on this

A letter of demand may be a formal request for payment. It will begin with the:

  1. Amount owing;
  2. Payment deadline - 7 days; and
  3. Consequences if payment isn't made, including recovery through legal proceedings

Court Proceedings to Enforce a Debt

To commence legal proceedings in NSW, a creditor must file a Statement of Claim with the appropriate Court. The relevant court depends on the quantity of the debt. For instance, the NSW Local Court can hear claims of up to:

  1. $100,000 in its general division; and
  2. $10,000 in its small claims division.

The path (and cost) of court action will depend upon whether the debtor files a defence to the proceedings. If a defence is filed, then both parties will submit evidence and attend a hearing.

However, if the debtor doesn't file a defence within 28 days, the creditor can apply for default judgement. This is judgement entered against the debtor without a hearing. The order for payment of a specific amount of cash (liquidated debt) as a result of default judgement is called the ‘judgement debt’.

Once you obtain a judgement debt, you will take further steps to extract your money called "enforcement action".

Exploring Enforcement Options

If your debtor fails to honour a court judgement and doesn't pay the judgement debt, then you need to enforce the judgement. In NSW, creditors can start enforcement proceedings at any time up to 12 years from the judgement date.

Before seeking court orders and commencing enforcement proceedings, a creditor can take steps to determine the simplest way forward. These are:

  1. Garnishee Order

    Issued to a 3rd party that either holds money on behalf of a debtor (such as a bank) or owes money to the debtor (such as an employer), requiring that party to deduct money from the account or wages and pay it towards the debt owed.

  2. Writ of execution (or levy of property)

    Directs the sheriff’s office to seize and sell property of the debtor to pay the creditor

  3. Writ for possession of property

    Directs the sheriff’s office to seize and sell the debtor’s real estate (i.e. land or a residence) to pay the creditor.

Taking Enforcement Action

When it comes time for formal enforcement action, a creditor can seek the following subsequent court orders:

  1. Examination Notice

    This may be a form sent to a judgement debtor that needs them to answer questions on their assets, income and other debts.

  2. Examination Order

    An application to the Court for an order requiring the judgement debtor to attend Court and answer questions on their assets, income and other debt.

  3. Conducting investigations of property ownership, insolvency and bankruptcy status

    Involves searching government records and registers, or engaging a personal investigator.

Where debts are above a particular amount, there also are other options for debt recovery in NSW. These include bankruptcy proceedings (against a private debtor) or a creditor’s statutory demand (against a corporation debtor).

Bankruptcy Proceedings

A creditor may seek a court declaration that the debtor is bankrupt. The creditor may do that where the debt is over $20,000 and no more than 6 years old. However, if the applicant is to enforce a judgement debt, the creditor must do so within six years of the judgement. Bankruptcy proceedings end in the debtor surrendering control of their money and other assets to a trustee. The trustee then aims to pay the bankrupt’s creditors - including you.

Statutory Demands

A creditor may issue a statutory demand against a debtor where:

  1. the debt is over $20,000; and
  2. the debtor is a company

A statutory demand may be a legal instrument issued under section 459E of the Corporations Act 2001 (Cth). It requires the debtor to pay within 6 months.

A statutory demand is often issued with or without a judgement debt. However, doing so without a judgement carries a risk that the debtor will apply to the court to set aside the demand. They will assert there's a ‘genuine dispute’ on the quantity or existence of the debt.

If the debtor fails to comply a statutory demand, they are deemed insolvent. As such, the creditor can commence wind up proceedings, by way of Creditors Petition to the Supreme or Federal Court. The downside of attempting to wind up your corporate debtor, is that it may have limited or no assets. completing a debtor is that the corporate may have limited or no assets. If the creditor is unsecured, they'll not get paid behind secured creditors. This is why we encourage you to talk to us and to have General Security Agreement in place before things go wrong. By registering your security on the PPSR your interest is secure.

Key Takeaways

If you're trying to recover a debt explore preliminary options first. Things like direct communication, letters of demand and alternative dispute resolution. It is often expensive to start bankruptcy and wind-up proceedings. This, including the danger that a creditor might not get paid in the end, creates a robust argument for investigating the debtor’s financial status first.

If you would like advice on the way to proceed with debt recovery in NSW, call Sydney Law Solutions.

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Aoife O'Donohoe

Aoife O'Donohoe

Solicitor | Sydney