3 Things to Consider Before Enforcing a Debt
It is an unavoidable reality in doing business that from time to time you will encounter customers or clients who either can’t, or won’t, pay outstanding debts. The question is then whether these debts can be enforced, and if so, whether it is cost effective and practical to do so.
There are many factors that come into play when deciding what, if any, steps to take in enforcing a debt. Some key things to consider are often the need to protect your brand, desire to continue trading with the debtor, and the cost of steps to force the debtor to pay.
Ultimately the decision on whether or not to pursue a client for an outstanding amount comes down to a commercial decision by the business owner. However, from a cost-effectiveness point of view, and as a matter of practicality, we have provided essential factors to bear in mind when deciding on whether or not to use the courts to pursue the debtor for payment.
When?
The first question you need to ask yourself is how old is the debt, or when was the debt owed? The answer to this can determine whether or not the debt is recoverable.
Depending on the circumstances it is not unheard of for businesses, or liquidators, to try and recover debts that have been owing for a number of years. While the rules vary, and it is important to consider the particular circumstances surrounding the debt, an action to recover a debt owing under a contract must be brought within 6 years of when the cause of action arose.
As a general rule, the cause of action will have arisen when the debtor is in default of their obligation to pay. For example, where an invoice required payment within 7 days of the date of that invoice, the cause of action will arise on the 8th day after then invoice is issued if there is no payment.
Where?
Any assessment of the cost-effectiveness and practicality of recovering a debt requires consideration of where the debtor is located.
Many contracts will contain jurisdiction clauses allowing the creditor to commence proceedings in a specified jurisdiction. For example, a Queensland business may require that a customer agree that any dispute is to be heard in the Brisbane Courts.
However, as discussed in some of our previous articles, commencing court actions and ultimately getting a judgment is often only the start, with subsequent enforcement action required. Where the debtor’s assets are located in another state (or even another country), enforcement against those assets will require that the judgment be registered in that jurisdiction. This will generally incur further costs.
What?
When deciding whether or not to enforce a debt, knowing about the financial circumstances of the customer is essential.
Any question as to the cost-effectiveness of recovering a debt requires a consideration of whether the debtor has the ability to pay the debt, whether the creditor has any information regarding assets owned by the business, or even whether the debtor’s business continues to trade at the time of enforcement.
Where the creditor lacks information regarding the debtor it is often necessary to commence what are called examination proceedings. These are proceedings, once you have obtained judgement, requiring the debtor to provide information regarding their ability to pay.
Commonly, the debtor (or a company officer) fails to respond and this can ultimately result in a warrant for their arrest. If, or when, they are apprehended they may reveal that there are no assets against which the judgment can be enforced.
Alternatively, the creditor may be aware of where the debtor is carrying out business and whether there are particular assets that may be seized. In this case, recovering the debt may be as simple as obtaining a warrant to seize and sell those assets, with the proceeds of the sale going towards repaying the debt as well as any costs incurred in pursuing the debt.
How We Can Help
If you require advice regarding prospects or options for commencing proceedings, or if proceedings have been commenced against you and you need advice on you options to defend those proceedings Streten Masons Lawyers can provide advice on all stages of the court process. Contact us at info@smslaw.com.au or call on 07 5428 1111 to talk about how we can help your business through the process.
