Debt recovery options for small businesses
As a small business, it’s essential that you receive payment or money owed to you within a certain time-frame. If you have been unsuccessful in recovering a debt after sending your own friendly reminders, attempting informal negotiations, and sending a letter of demand, you might consider taking some more formal steps towards recovering moneys owed. Debt collection services or legal action are the next steps – and although such measures may result in a tense business relationship with the debtor, it could be that being paid is more important. Taking formal action will show your business will not tolerate non-payment, which can be advantageous in future disputes over debts owed.
Debt recovery by traditional debt collection services
Debt collection agencies usually work on a commission percentage of the debt; rates vary between 5% and 30% of the debt value – so it pays to shop around for a low rate. A letter of demand will be sent by the agency stating that the debt must be paid by a certain date or legal action may be taken, and sometimes a further and final letter of demand will be sent stating the same. If the debt is still unrecovered, the debt collection service can then be engaged by you to take legal action on your behalf.
Debt purchasing
Sometimes you may sell your debt to a debt collection service for a very small percentage of the amount owing to you. As this means of debt recovery will only yield a small proportion of the amount you are owed, it should only be considered when you have completely written off the debt, and all other avenues are exhausted or impractical.
Online legal debt recovery
These services generate and send a letter of demand for you using information supplied about the debt and debtor, and charge you a fee for the letter. While this can seem like a quick and cost-efficient process it’s important to be aware that you lose control over what is written, and legal advice is generally not provided.
Engage your lawyer
Consulting your lawyer may be the best way to go. A lawyer can draft a specific letter of demand to the debtor that is sensitive your business relationship with that person or business in an effort to minimise collateral damage, while still asserting your right to payment. A follow up letter can be sent as well as phone reminders, and if necessary a payment plan can be worked out that allows your debtor to pay you the full amount owed without further (costly) legal action being required. A letter sent by your lawyer will hold a certain amount of weight and hopefully trigger some sort of positive action from your debtor. If there is a reason the debtor is withholding payment, your lawyer can provide advice on your legal position, rights and likely outcome of pursuing legal action to try to recover the debt, (and whether it is worth it weighing up the legal costs). Your lawyer can help to ascertain whether the debtor has enough money and/or assets to cover the debt, before taking any legal action.
If the debt is for less than $100,000 you may recover your debt through the Magistrates Court of Victoria. (The County and Supreme Courts deal with debts for over $100,000.) Your lawyer will issue a Complaint, serve it on the Defendant (the debtor), and if there is no defence filed, file an Application for Order in Default of Defence form. If there is a defence filed by the Defendant, the matter will be set down for mention and may be referred to a conciliation conference and/or arbitration prior to a hearing date being set. The aim here is for you and the debtor to discuss and hopefully resolve the issue, and avoid a hearing.
Once you have either received an Order in Default of Defence, or been to the hearing and obtained judgment, you may need to enforce judgment if the Defendant doesn’t pay within a reasonable time. Your lawyer will apply to the court for the Defendant to attend an oral examination of their earnings and assets, and then may pursue payment through an instalment order, an earnings order (that will take payment from the debtors’ wages), or a warrant to seize property. You may wish to bankrupt the judgment debtor if they are a person and the debt is over $5000, or ‘wind-up’ the debtor if they are a company to place them in liquidation – and receive the money owed to you as a creditor. These legal pathways are not without complication or cost, and you and your lawyer will decide together whether it will be a worthwhile effort considering the time and money involved, and likely chance of success. If you are winding up a company, your lawyer will check that your debt will not be superseded by debts owing to other creditors.
Mediation
If you find out that there is a business dispute over the owed money, you can utilise a free or low-cost mediation service, such as the small business commissioner, to try and resolve the situation. It might be that the debtor is withholding payment for a valid reason, and you may both need to compromise to come to a satisfactory outcome (and avoid an expensive and stressful legal dispute.)
Banned practices for debt collection
There is a list of banned debt collection practices. In summary, the use of threatening behaviour against the debtor, their family, or on their property in any way, is illegal. If the debtor advises you in writing that they wish for no further communication to be made about the debt, then the only avenues available to you are a) contacting the debtor through an action issued by a court or VCAT; b) threatening to take the debtor to court or VCAT action; or c) applying for the debtor to comply with a requirement under the National Credit Code (this Code will only apply if you have entered a credit contract or consumer lease with the debtor.)
Jessica Kerr is the director of Sinclair + May. Jessica set up Sinclair + May with a view to do law differently and make legal services accessible for small businesses. Sinclair + May operate on a fixed fee basis and offer retainer services for their clients. Sinclair + May is a female-led, boutique commercial law firm and work extensively with the creative industry. You can follow Jessica on instagram @thelawyerslunchbox for more useful legal tips and see more about Sinclair + May at www.sinclairmay.com.au.
