Debt Recovery and Corporate Insolvency Processes
A creditor can recover money owed by a company in a number of ways. And as a director you need to know your rights and obligations if those debt collection processes expose your company to legal action and enforcement.
What types of notices should you seek advice on? And what are the consequences if your company can’t pay its debts when they fall due?
Here are some of the primary debt recovery options your company may have to deal with.
Letter of Demand
The first weapon a creditor draws from its arsenal is usually a letter of demand. It sets out how much the company owes the creditor, and a demand for payment (usually within a tight time-frame). If the debt isn’t paid by the date specified in the letter, the creditor can then take the matter to court.
A creditor can also use a letter of demand in court proceedings to prove the creditor’s attempt to settle the matter before filing a claim. A debtor can respond to a letter of demand by:
- paying the amount in full
- seeking a repayment arrangement
- negotiating a part-payment in return for the creditor not taking legal action.
Statement of Claim
If a letter of demand is unsuccessful in securing the debt payment, they can then take court action against the company by filing a ‘Statement of Claim’.
The Statement of Claim pleads the case against the Defendant, and seeks full payment of the debt (also known as a ‘liquidated claim’). Claims against debtor companies must include the Australian Company Number (ACN) and the registered office of the company.
Once a Statement of Claim is filed, the Defendant has 28 days to file a defence. If they don’t, the Plaintiff (who filed the claim) can seek a default judgment against the Defendant.
The debt amount dictates the court jurisdiction. In NSW, the options are:
- Debts under $10,000: Small Claims Division of the Local Court
- Debts between $10,000 and $100,000: General Division of the Local Court
- Debts over $100,000 and up to $750,000: District Court
- Debts over $750,000: Supreme Court.
Enforcing a Judgment Debt
Once the creditor obtains a judgment debt (known as a ‘judgment debtor’), it can be enforced in various ways:
- Writ of possession for land (Supreme or District Courts)
- Writ of delivery for goods
- Examination summons, where the director of the judgment debtor can be summoned to:
- answer the Court’s questions about how company and its assets can satisfy the judgment
- provide documents showing the company’s financial circumstances.
- Writ of execution, where the Sheriff can attend the judgment debtor’s premises, seize and sell them, and give the proceeds to the judgment creditor.
- Charging order, which can apply to:
- property such as stocks and shares in a public company
- money on deposit in a financial institution
- any equitable interest in property (Supreme or District Courts).
In NSW, a judgment debt can usually be enforced for up to 12 years after the judgement date (or longer if granted by a court). If standard debt recovery procedures are unsuccessful, the creditor may wish to begin wind-up proceedings against the company.
Winding it up with a Statutory Demand
While obtaining a judgment debt is prudent, a creditor doesn’t necessarily need it to take action. It can simply seek to have the company wound up by serving a Statutory Demand. Winding up a company is similar to filing bankruptcy proceedings against an individual except it only applies to corporate debtors.
One of the most powerful business debt collection tools available to a creditor, it’s a notice a creditor issues to a company stating that if it doesn’t pay the debt, the creditor will apply to the court to wind up the company on the basis of it being insolvent.
(The test for corporate insolvency is contained in section 95A of the Act. Basically, the company can’t pay its debts when they’re due, it’s deemed to be insolvent.)
A Statutory Demand gives the recipient or debtor company 21 days from the demand date to either:
- pay the debt in full
- file an application in court to have the demand set aside on the basis of a genuine dispute.
At the end of the 21 days, the company is deemed to have failed to comply with a Statutory Demand.
Ignoring a Statutory Demand can have grave consequences for your company. If the debt isn’t paid within 21 days, and an application isn’t filed to have the demand set aside, the creditor can lodge a winding up application and the court can appoint a liquidator to wind up the company.
Other Rules and Processes of Statutory Demands
- A Statutory Demand must correctly state:
- the debtor’s name and registered office of the company
- the exact debt amount
- a place in Australia where the debt can be paid.
- The Statutory Demand can’t include a claim for unliquidated damages, and the debt amount must exceed $2000.
- Service can be achieved by:
- leaving the demand at the debtor company’s registered office
- posting it to the registered office
- serving it personally on a company director who resides in Australia.
- Multiple creditors aren’t allowed to serve a single Statutory Demand on one company.
- A creditor can’t serve a Statutory Demand while proceeding against the directors for the same alleged debt.
For more information on corporate insolvency or specific insolvency services, get in touch with us to arrange a confidential consultation. (We’ll even wear the cost of the initial meeting for referring accountants.)