Managing bad debtors

Taking legal action

If the collection process is unsuccessful then it may be time to consider the legal process. The first step is to send a letter of demand. This letter serves three purposes:
  • it warns the debtor of your intention to commence legal proceedings unless payment is made
  • it gives the debtor another opportunity to pay
  • it provides evidence which may be tendered in court as proof of your claim of the debt owed and your attempt to settle the matter.

This letter should request that the debtor pay the outstanding account by a specified date. It should also include details of the debt (including letters of agreement, invoices etc) and indicate that legal action will be taken if payment is not made by the date specified. It is advisable to send the letter of demand by registered post or fax to confirm receipt.

A letter of demand can be drawn up by the business or by a solicitor. Copies should be retained by the business as they may be required as evidence in the legal process.

If a small business receives no response to its letter of demand and the outstanding account relates to a business (rather than a consumer) they have the option to issue a statutory demand. That is a formal version of a letter of demand which is set out in a similar way to a court document. A statutory demand indicates that legal action will occur if the debt is not paid within 21 days. A statutory demand can be drawn up by a business or a solicitor

If a firm has exhausted its other options and is seeking to recover outstanding monies through the courts it is advised to seek legal advice if it has not already sought outside expertise. The legal process can be complicated and utilising the services of an expert will assist in understanding issues such as which court will hear your appeal - the dollar value of the outstanding debt determines which court each case is assigned to.

Legal proceedings follow a number of steps:

  1. Statement of Claim
  2. Serving the Summons
  3. Legal Proceedings
  4. Enforcing the Judgement.

To commence legal proceedings a business (the plaintiff) must lodge a Statement of Claim against the person / company (defendant) that owes the debt at the relevant court. A Statement of Claim sets out who owes money, how much is owed, when and how the debt arose and how long the defendant has to pay the funds back.

If the defendant is a business the plaintiff is required to provide the business name, address, place of business and ABN (for companies). This information can be obtained through a credit reporting agency or from the Australian Securities and Investments Commission (ASIC).

Following the lodgement of the Statement of Claim the plaintiff will be issued a Summons that must be served to the defendant. A Summons is a court document which informs the defendant that a legal claim has been made by the plaintiff for a certain amount of money - it can be served by the Sheriff's Office or the plaintiff. If the plaintiff chooses to serve the summons directly they must ensure that the correct process is adhered to as every court operates under different rules. 

Upon receiving the Summons the defendant may ignore the Statement of Claim, file a confession or file a defence. If no response has been received within 28 days the plaintiff can ask the court to make a default judgement. This will require the plaintiff to file an Affidavit of Service (stating how the service was carried out) and an Affidavit of Debt (stating the amount owed). The court will then make a determination about the monies owed. 

If the defendant confesses to the debt they will often request to pay the account in instalments - the court can honour or reject this request. If the court makes an instalment order and the plaintiff rejects it or if the court refuses to grant this order a hearing will occur to determine an outcome.

If the defendant denies owing the money they will file a defence. They may also raise a claim against the plaintiff or another person (a cross claim). The court process that follows this filing differs depending on the dollar value of the disputed debt. Due to the complex nature of formal court proceedings, businesses should seek advice from a solicitor if the debt recovery issue is forced to enter the courts.

If the defendant is successful in its legal proceedings it must take action to recover the funds from the debtor (enforce the judgement). 

To recover the debt a small business can: 

  • Issue a writ of execution. This will result in the Sheriff's Office visiting the debtor to try to collect the money
  • Issue a writ against land. This option is taken if the writ of execution is unsuccessful
  • Issue a garnishee order to anyone that owes the debtor money. The order instructs the garnishee to direct the monies owed to the creditor
  • Issue an examination summons. This action is used if little is known about the debtor's financial position - it requires the debtor to attend court to have their financial position examined
  • Seek the debtor's bankruptcy. 

Legal proceedings can be complicated and expensive and as a consequence it is important that small firms consider this option carefully before pursuing a claim through the courts. The first thing to consider is the size of the debt - is it worth pursuing given the time and costs associated with legal action?

The second consideration is whether or not the debtor has assets that could be used to cover the debt. If they don't, there is little value in pursuing the debtor through litigation. Finally, the business must seek good advice on their specific situation - otherwise precious time and money will be wasted which could be better spent on other areas.

Remember, always seek legal advice before you take formal action and remember that laws often change and are different in each state.

Connect with us to receive updates throughout the day:

Like us on Facebok Follow us on Twitter

Dun and Bradstreet AustraliaTop of page Dun & Bradstreet Australia Pty Ltd 2015 | D&B Small Business    *About Us    *Sitemap    *Advertise    *Privacy    *Terms & Conditions