Article by Dean Jones
Debt recovery is an ongoing problem for many businesses however several measures can be taken to reduce the likelihood of bad debts arising and to help deal with bad debtors more effectively.
The most effective debt recovery measures that can be taken are those that avoid bad debts arising altogether.
It is important that all businesses have written contracts with their clients prior to the commencement of work. Written contracts should apply to all clients, whether they are new clients or clients that you have been involved with for many years. Written contracts are not only necessary because they can be relied upon in a court of law, but more importantly because they clearly outline each parties obligations, therefore if a dispute does arise with your client you can both refer back to the contract for clarification.
Written contracts should clearly outline:
The nature of services or products you will be providing to your client.
The cost of those services or products.
How those costs will be calculated, for example hourly rates* or fixed amounts.
The terms of payment.
The penalties for breaching the terms of payment, for example interest or suspension of account.
If necessary, a guarantee, personal charge or Romalpa clause can be included in your written contract as security for payment. The effects of such instruments include making individuals liable for company obligations or ownership of products not passing until full payment is received. Consult your lawyer to determine which security is most appropriate for your contracts and to draft the required documents.
*Where services are being time costed it is also important to provide your client with quotes or estimates, as well as revised quotes or estimates whenever necessary, in order to avoid disputes about costs.
While written contracts will not avoid disputes altogether, or even guarantee success in a court action, they at least provide a handy starting point for attempting to resolve a dispute should one arise. In particular, written contracts that provide you with security for payment can be very useful tools for bringing in bad debts.
There are other safeguards that can be taken if you are unsure about a client’s ability to fulfil their obligations to you. If you are concerned about a client’s ability to pay you can request searches of a company name or individual’s assets, via organisations such as ASIC or the Land Title’s Office, or through your lawyer. If it is a new client you may consider asking for an up-front payment in the first instance. If it is an ongoing client who has fallen behind on payments you should consider ceasing the provision of your services until all payments are brought up to date.
Finally, all accounts should be reviewed diligently and clients with overdue accounts should be contacted on a regular basis and reminded that their payment is overdue. Having systems in place to ensure this occurs is vital to any business’ cash flow and avoids situations where an overdue account becomes a bad debtor who can no longer be contacted.
Recovering the debt
There are several options available for recovering bad debts that will vary depending on the size of the debt and nature of the debtor. Whatever the case it is always advisable that in the first instance you arrange for a letter of demand to be sent to the bad debtor by your lawyer. This will ensure that the debtor is aware that you are serious in pursuing payment, whilst at the same time providing the debtor with a final opportunity to make payment arrangements. This is a low cost means of pursuing the debt and often succeeds in prompting the bad debtor to enter into negotiations.
Where a letter of demand does not succeed the next step should be determined by the facts of each individual case. There are generally two types of debtors – those disputing payment & those avoiding payment – and they should be approached differently.
Generally, those who dispute payment are more likely to defend any court action brought against them therefore court proceedings should be considered with caution. Even if you have a high prospect of success in a court action, proceeding to a hearing can be costly. However, issuing court proceedings against a bad debtor is often successful in instigating negotiations. If after issuing legal proceedings you cannot reach an agreement with the debtor you must then weigh up the amount of the debt against the cost of proceeding to hearing. You should also consider the likelihood of recovering your claim amount should the court make an order in your favour. These factors highlight the importance of the initial safeguards outlined above, signed written contracts can be invaluable in court whereas a simple search of an individual or their company may mean you never would have risked involvement with the debtor in the first place.
Debtors who are avoiding payment often will not defend court proceedings therefore obtaining a judgement against them can be more easily obtained. However, the problem of recovering the claim amount remains and again can be costly. It is common for these types of debtors to offer instalment arrangements therefore if you believe such an offer is genuine negotiating an agreement such as this may be preferable to continuing with legal action.
Bad debtors often have a history of unpaid debts and can disappear on a regular basis. Due to this it is important that action to enforce judgement is taken swiftly. Again, the appropriate action depends on the individual circumstances of each case. Where the debtor is working but is unlikely to have any valuable assets oral examinations or attachment of earnings orders may be appropriate. Where the debtor has some valuable assets, such as a car or a property, a warrant may be preferred. Where the debtor is a director in a company the threat of bankruptcy proceedings may be sufficient to induce payment. The costs associated with each action vary however regardless they will continue to increase the longer the debt remains unpaid, particularly if you continually require the use of investigators to re-locate debtors. Therefore it is important that you identify the most appropriate action to take and to take that action as quickly as possible.
In summary, the longer the debt remains unpaid the greater the risk that you will not recover the monies and the more money you will be required to spend in attempting to recover the debt. Therefore, the most efficient debt recovery approach is one that minimises debts in the first place by seeking signed written contracts, monitoring clients’ ability to pay and reviewing overdue accounts diligently. Where debt recovery action is required be prepared to negotiate and if enforcing judgements make sure this is done as quickly as possible.
Eales & Mackenzie Legal & Corporate Advisors have the knowledge and expertise to assist your business in order to protect your interests and to achieve your business goals. If you require any assistance with debt recovery, such as drafting letters of demand, issuing court proceedings or enforcing judgements, you can contact Dean at Eales & Mackenzie