So you have provided goods and/or services to someone and they have failed or refused to pay you. As a solicitor who is quite active in the area of debt collection, whether its pursuant to an agreement written or oral, to provide goods or services, and which agreement has been breached by the fact that the recipient of the goods and/or services refuses to pay, then the common complaint is that chasing a debt is sometimes like a dog chasing its tail.
It can be rather frustrating as the cost and time that it takes for someone to pursue a debt may often appear to outweigh the debt itself. Today’s blog will attempt to explain the procedures that you have to go through to chase up a debt.
Letter of Demand
The first step to recover a debt from a party is generally to send a letter to the debtor giving them notice of the debt and demanding payment within a time period. Many people commonly refer to this as a letter of demand. In South Australia it is a requirement under the Rules of Court that you give 21 days for the debtor to pay you the debt or come to some arrangement to pay the debt. The purpose of the letter of demand is to:
- warn the debtor of your intention to institute legal proceedings unless payment is made; and
- provide them with a final opportunity to pay the debt.
In South Australia you can obtain a Final Notice of Claim from the Magistrates Court or send your own letter of demand to the debtor. If you don’t do this then, you cannot recover your costs of filing your claim against the debtor if you are successful. You can purchase the Final Notice of Claim online at or at the registry of any Magistrates Court in South Australia.
If legal proceedings are instigated then the letter of demand can be used in later court proceedings to demonstrate that you have made an attempt to resolve the claim before instigating legal proceedings.
If you do not receive a response to the letter of demand or the response is not acceptable to you then you can proceed to instigate legal proceedings in the appropriate court.
If the debtor agrees to pay the debt by way of periodic payments then it is highly recommended that an agreement is written setting out the amount of the periodic payment and when payments will be made. For example you may include words like “$100.00 per week commencing on a date and weekly thereafter”.
To sue or not to sue
Many people who are owed money agonise over whether they should commence court proceedings or not, in order to recover a debt. In deciding, whether or not to commence a debt recovery action and when you should do this it’s important to consider:
- the amount of the debt;
- whether the debtor can pay;
- whether there is a genuine dispute over the debt.
If you do decide to instigate legal proceedings to recover the debt, it’s then important to ensure that:
- the evidence to support your claim is strong; and
- you are not out of time to instigate legal proceedings (usually 6 years after the agreement for the debt arose or the last demand was made).
Whilst a letter of demand may be in the same terms whether it is addressed to an individual or a company, the law relating to formal proceedings for the recovery of the debt differ between an individual and a company.
No Genuine Disputes
If there is no genuine dispute, what this means is that the debtor does not dispute that the amount is due and owing or that there is a set off against the debt, as to the debt then the action to be taken depends upon whether the debtor is a corporate entity or a personal debtor.
If the debtor is a company owing more than $5,000 and the debt cannot be disputed, then sending a Statutory Demand is advisable. The form of the Statutory Demand must comply with the form prescribed by schedule 2 to the Corporations Regulations 2001 and state the debt is to be paid within 21 days.
If the response to the Statutory Demand is unsatisfactory, then you may apply to court to have the company wound up and recover your debt in the winding up. Caution must be exercised to ensure that there is no "genuine dispute".
If your debt is owed by a personal debtor and is not genuinely disputed, you still must issue proceedings in the appropriate court, which is dependent on the size of the debt as above.
A Bankruptcy Notice requires a debtor to pay the judgment debt or make arrangements for its payment within 21 days. If the response is unsatisfactory, you can then lodge a petition in the Federal Circuit Court to have the person declared bankrupt. Lodging a Creditors Petition in the Federal Circuit Court costs $1,280.00 if you are a natural person (an individual or a small business with less than 20 employees) and $3.075.00 if you are lodging on behalf of a corporation with over 20 employees.
In addition, a Bankruptcy Notice must be filed with the Insolvency and Trustee Service Australia which also attracts a fee.
As can be seen, the procedure is costly and for that reason is not usually undertaken unless the debt is at least $5,000.
What you will need to know about the debtor?
A claim for a debt can be brought against a person (sole trader), a group of people (partnership) or a corporate entity (company, incorporated association). If the debtor is trading under a business name you need to do a business name search to identify the owner of the business. This can be done by carrying out a search at the Australian Securities and Investments Commission (ASIC) Business Names Register.
If the debtor is a company you will need:
- the company’s Australian Company Number (ACN);
- the address of the registered office at which to serve the Statement of Claim; and
- to ensure that the company is not in liquidation.
These searches can be conducted via ASIC upon payment of the appropriate fees.
Therefore it is of the utmost importance to know who the claim for the debt is against.
Once you have determined who the claim is against, then you need to determine in which court the action is to commence. This depends on the amount of the debt.
In South Australia, a debt up to a maximum of $25,000.00 may be commenced in the Magistrates Court Civil (Minor Claims) Division. This means that lawyers do not have to be involved in claims for debts below $25,000.00. The objective is for people who are owed money not to incur legal fees for the involvement of lawyers. Claims of between $25,001 and $100,000 may be dealt with in the Magistrates Court Civil (General Claims) Division.
Claims for debts greater than $100,000.00 must be made in the District Court of South Australia Civil Division. The District Court Civil Rules 2006 will apply to any proceedings commenced in the District Court.
Any proceedings for the winding up of a company based on the inability to pay a debt when it becomes due and payable, under the Corporation Act 2001, must be commenced in the Supreme Court of South Australia.
Debts over $100,000
Debts over $100,000 may be recovered in the District Court of South Australia. The requirements for the letter to the debtor are more complex; it must contain an offer for settlement (which may simply be the full amount of the debt) and sufficient details as to how it is claimed the debt arises and is due and payable along with any copies of documents that support the proposed claim.
Pursuant to the Court Rules the debtor is required to respond within 21 days. If you do not receive a response or the response is unsatisfactory, you may issue proceedings to recover the debt after 21 days. If a creditor is not prepared to wait the period of 21 days proceedings may be issued, however if successful the creditor may not recover all costs associated with the proceedings. Due to the formality of the District Court, it is advisable to seek advice from a lawyer experienced in debt related matters prior to commencing proceedings.
Upon obtaining judgment you will also have a number of enforcement processes available which will address in a future article.