For small businesses, dealing with outstanding accounts can be stressful and potentially crippling. If you have a good relationship with your customers, you should hopefully be able to discuss and negotiate the payment of outstanding invoices without having to resort to legal recovery processes, but if that doesn’t work, you may have no other choice.
Whilst this article has been written in the context of business relationships, the same principles can be applied to personal relationships when money is lent between family or friends.
How do you demand payment of a debt from an existing customer?
With great skill and care. If the customer isn’t paying your invoices, are you sure that they will pay you for future goods or services to be provided? To provide some certainty for payment, you can obtain security for the goods or services supplied, such as personal guarantees or registration of a Security Interest on the Personal Property Securities Register.
Once you have made phone calls and issued demand letters without success, the next step is to refer the matter to a solicitor, who will follow a set procedure and timeline to recover the outstanding debt.
Often, a request for payment sent on solicitors’ letterhead results in payment from the recalcitrant customer or at the least, starts a conversation about whether the customer intends to pay at all and if not, why not. We always recommend that this step be taken, even if you have sent several demand letters yourself to no avail. If legal proceedings are issued without a solicitor’s demand letter first being sent, this can sometimes jeopardise the success of any subsequent court action.
The cost for the solicitor’s initial letter of demand should be minimal. When you initially speak to a solicitor about how best to recover the debt, the solicitor can give you cost estimates for each step. Fixed cost arrangements are also available.
Is it worthwhile issuing legal proceedings for recovery of the debt?
By the time you refer the matter to a solicitor, the chances are that you are no longer trading with the customer that owes the debt and there is no foreseeable prospect of re-establishing that relationship. Sometimes, mediation between the parties, prompted by solicitors, can re-establish the trading relationship. Mediation is a structured negotiation process in which an independent person (the mediator) assists the parties to identify and assess options and negotiate an agreement to resolve their dispute.
The amount outstanding usually determines whether legal proceedings are worthwhile. Litigation doesn’t always lead to a successful outcome. A commercial resolution is usually the best outcome as it provides a certain outcome now, compared to the unknown and costly outcome that could result from litigation being commenced. The issue of court proceedings, bankruptcy or liquidation proceedings often prompts a silent debtor into action. In the world of debt recovery, an angry debtor is better than a silent debtor.
Once you have judgment, what happens next?
If you are able to obtain a court judgment against your debtor, it doesn’t guarantee that you’ll actually receive the money that the debtor has been ordered to pay. Often, obtaining judgment is the easy part – enforcing payment of the judgment is another story.
If the debtor simply doesn’t have the money to pay you, there is no point throwing good money after bad. If you believe that the debtor does have the means to pay you, there are several enforcement options available. These include, in our order of preference:
- A garnishee order – this is an order that can be served on a third party who owes money to the debtor, directing the third party pay that money to you rather than the debtor. This is a particularly good option if you have details of the debtor’s bank accounts, as the garnishee order requires the bank to pay you the money held in the account.
- A writ for the levy of property – this directs the sheriff to take and sell property of the debtor, such as vehicles, boats, equipment and some household items.
- Bankruptcy and winding up proceedings – if the debtor is an individual and the debt is over $5,000, action can be taken to have the debtor made bankrupt. If the debtor is a company and the debt is over $2,000, winding up proceedings can be taken to place the company into liquidation.
- An examination notice – this enables you to find out more about the debtor’s financial position. It directs the judgment debtor to answer questions and provide documents relating to their assets, income and liabilities. You can then determine the best way to enforce the judgment.
Please contact SRM Lawyers to answer any enquiry you have relating to your business or debt recovery options. We’re happy to have a chat with you about your situation, if you’re not sure of the best approach to take.
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This is advice of a general nature, this article does not constitute legal advice and is not meant to be complete or exhaustive.
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