Debt Management

Effective Debt Management & Recovery – Critical to any successful business.

GRANT HACKELTON & ASHLY DILGES, Legal Practitioner Directors of CLH Lawyers look at the importance of an effective debt management and recovery process and it cannot be underestimated.

The importance of an effective debt management and recovery process cannot be underestimated. A tightening economy, competition from rival businesses and the seemingly never-ending operating costs faced by suppliers, all underpin the need for an effective debt management and recovery regime by your business.

The first line of defence in effective debt management is ensuring all of your customers have signed a credit application with terms and conditions which operate in your favour. Such terms and conditions may include:

• the provision of directors guarantees by incorporated customers;
• the ability to register a charge over directors real property by way of a caveat;
• the capacity to register an interest in goods supplied by you on credit on the Personal Properties Securities Register (thus ensuring to the extent possible, that your unpaid goods remain your property should an insolvency event affect your customer); and
• a clause that seeks the recovery of your legal costs on a solicitor/client basis.

A comprehensive credit application which includes such terms and conditions puts your business in the best possible position to protect goods supplied on credit. It may also minimise the impact of unpaid debtors on your bottom line.

Another key benefit of a credit application is the correct identification of your customer. This is crucial. From time to time we act for clients who don’t really know who their customer is, who have the wrong ACN recorded, or think that there may be a Trust involved but they have no idea who the Trustee of the Trust is. Since a Trust can only be sued via its Trustee, the identity of same is an absolute necessity to begin any legal proceedings involving a Trust as a Defendant.

Worse still, occasionally we have acted for clients who don’t have any credit application at all in place, making the identification of the customer more difficult and potentially meaning that any contractual relationship between the parties is governed by the customer’s terms and conditions, not the supplier’s.

CLH Lawyers can assist your business in developing a credit application or amending an existing document. A credit document template was developed between CMPA and CLH Lawyers with a workshop held for CMPA members on this issue back in 2013.

The second line of defence is the tight management of credit limits and quick action in respect to those debtors exceeding your trading terms. Quick action may not necessarily mean legal proceedings, but rather a reduced credit limit, the customer being placed on stopped or restricted supply until any outstanding balance is paid, or COD only for future dealings (remembering that for COD to be truly effective, it must be COD – no exceptions).

Suppliers must be wary of customers who dishonour payments, exceed your trading terms and/or credit limit, or whose payment patterns change. This may be symptomatic of the customer becoming insolvent – a risk which may be passed onto your business in the form of a preferential payment claim by a liquidator if payments are made to your business within approximately 6 months of your customer being placed into liquidation, so beware!

The third line of defence is regular communication with your customer. If debts are outside terms, you need to find out why. If your client has exceeded their credit limit without approval, you must ascertain what’s going on. If a customer with a previous good payment history has suddenly become a poor payer, you need to know the reasons why. Remember, a prudent supplier will respond quickly to a bad payer and make informed decisions about the level of future risk it is prepared to take.

One significant pitfall we regularly see is clients who get put ‘on the drip’ by their customers. In those instances, the customers only ever pay enough to keep the relationship from souring, but in the background the level of indebtedness continues to grow. Over time, the indebtedness often balloons to levels which would be seen as unacceptable if they occurred quickly. When reviewing your accounts, ask yourself whether any of your clients presently have you ‘on the drip’.

Adherence to the above may see the debts of your business managed so that legal proceedings are not necessary, however thought should be given to the following guidelines in the event they are:

1. Ensure you have a complete paper-trail of your dealings with the debtor in relation to your unpaid debt before seeing a solicitor. Solicitors generally (though not always) charge on a time basis, and providing all possible information in one-hit, such as the credit application, invoices, statements, credit notes, relevant emails, demands, and file notes of conversations, may avoid the need for multiple visits or contact with your solicitor, and potentially lead to a lower legal bill.
2. Negotiate with your solicitor. Ask them if they can do part of the recovery for a fixed fee. Your whole matter could potentially be resolved with one letter of demand and two phone calls from a solicitor – all for a possible fixed fee. Sometimes the mere idea of legal proceedings is enough to secure payment in full.
3. Delay is welcomed by debtors. If a decision is made to pursue a debtor, it ought to be done promptly and professionally, with little or no further indulgences provided to the debtor, without reasonable cause. Debtors are after all costing your business money.
4. There are many good solicitors who are proficient in many different areas of the law, but are they proficient in debtrecovery, litigation and insolvency? Seeing a solicitor who specialises in debt recovery has real advantages as it can help you avoid being led into common traps.

Has your solicitor advised you that issuing legal proceedings in Victoria for under $500 isn’t commercial, because legal costs won’t be recovered if the matter is defended unless exceptional circumstances exist, even if the claim succeeds? This is not the sort of information you wish to find out too late.

Has your solicitor warned you that a costs cap will likely apply to defended matters where the debt is less than $10,000, meaning that there may be a significant shortfall between your incurred legal costs and your recoverable costs should the matter be defended, even if it succeeds? That’s important to know when assessing whether you should proceed.

Has your solicitor advised you that you don’t necessarily need a judgment to issue a statutory demand against a company for the payment of a debt more than $2,000, provided that there is no genuine dispute about the debt, and what factors may be relevant to drawing that conclusion? This is extremely useful inside information which can save you thousands!

The above are all factors relevant to the commerciality of pursuing a debtor, and in respect to which a solicitor well-versed in debt recovery practice and procedure may advise you upon, subject to your individual circumstances.

Further, an experienced debt recovery solicitor is proficient in all methods for enforcing judgments and is able to make an informed recommendation to you, taking into account the size of the judgment debt, the debtor’s circumstances, and what method may lead to the quickest payment of your judgment debt. Such methods of enforcement may include bankruptcy proceedings, winding up proceedings, attachments of earnings applications, and warrants of execution of seizure and sale.

For over a decade*, CLH Lawyers have worked for all sorts of creditors including banks, major Australian companies, Trustees, Liquidators, and businesses, both large and small, and we have pursued debts owed to our clients with skill and professionalism.

CLH Lawyers are experienced in all aspects of debt recovery, litigation and insolvency, and are available to assist your business if required. We would welcome the opportunity.

Our contact details:
Ashley Dilges 
Legal Practitioner Director 
Level 7, 525 Flinders Street 
Melbourne Vic 3000 
03 9628 2801 

Grant Hackelton
Legal Practitioner Director
Level 2, 28 Margaret Street
Sydney NSW 2000
02 9220 0222

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