While most business owners agree that chasing overdue accounts through the courts is the business owner’s worst nightmare, the importance of vigilance in reviewing and maintaining an adequate cash-flow goes without saying.
Businesses can go broke for lack of cash-flow. It’s that simple.
The most common excuse for not managing outstanding invoices is that debt recovery means taking time away from the business and potentially having to pay significant legal fees. Or that the cost of chasing the debt doesn’t guarantee the money will be recovered making the fix worse than the debt.
Whilst both of the above statements are very valid concerns, the truth is that if you run a small business, it’s essential to understand how the legal process works and the likely costs involved in debt recovery. This will ensure you are in a good position to accurately conduct a cost vs benefits analysis to ascertain what debts to chase and when to write a debt off.
Don’t let your debts age – The sooner you act the sooner you will recover.
It is always beneficial to resolve outstanding debts as soon as possible, potentially minimising costs in the long run. An essential component of a good debt collection system is to incorporate escalating follow-up steps at predetermined intervals, beginning with reminder letters and progressing from there.
However, once strategies like these have been exhausted and there has been no response from the debtor, it may be time to resort to legal action.
A statutory demand under Section 459E of the Corporations Act 2001 (C’th)
This action only applies to a company debtor (as opposed to an individual debtor). The statutory demand is issued by the creditor for a debt of at least $2,000 and the company debtor has 21 days to:
i) pay the debt;
ii) negotiate a settlement; or
iii) apply to the court to have the demand set aside due to (usually) a ‘genuine dispute’ as to the existence or amount of the debt.
If the company debtor takes none of these steps, then the legal presumption is that the company debtor is insolvent.
Insolvent companies are unable to trade and may be wound up by a creditor’s petition. If the company debtor is wound up, then the directors may potentially face exposure to personal liability for the company’s debts for allowing the company to trade while insolvent.
Moreover, in practical terms, the presentation of a statutory demand on a company may constitute a default under many financing documents potentially leading to the withdrawal of the facility, dependent on the particulars of the loan agreement – a situation to be strongly avoided by most debtor companies.
Keeping a tight watch on your debt exposure should be well managed from the outset with robust business contracts and standard terms of trade in place amongst other things. However, despite the very best of intentions, disputes over payments will inevitably arise. It may be that in the circumstances, a statutory demand against the debtor company is a more effective way to resolve the outstanding debt than litigation.
The above article merely presents a brief overview and commentary on one element of the debt recovery process and does not constitute legal advice. Should you have any queries in relation to outstanding debtors or the debt recovery process, please don’t hesitate to contact the highly experienced debt recovery team at Havilah Legal.
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