By Kate Davey (Lawyer) and Paul Welling (Principal Solicitor)
So you’ve tried the usual methods – sending outstanding invoices with “REMINDER: your account is overdue” stickers on them and making follow-up telephone calls – what’s next?
Letter of demand
This document, usually sent on a lawyer’s letterhead, states how much is owed and on what basis. It concludes with a warning that legal action may be taken if the debt is not paid by a particular date.
A letter of demand should not claim interest or costs unless you have a legal entitlement to claim those amounts.
A letter of demand can be prepared quickly and inexpensively. It is often all that is required before a debtor pays their debt.
Consider agreeing to a payment plan
A payment plan (where the outstanding debt is paid in instalments) is generally a good way to recover a debt without incurring further legal costs, time and inconvenience.
We recommend that you engage a lawyer to properly document your agreement so that you are protected if the debtor fails to make payment as promised.
Consider a Statutory Demand
In certain circumstances, a Statutory Demand issued under Section 459E of the Corporations Act 2001 (Cth) may be an appropriate method for recovering a debt from a company. After being served, a debtor company has 21 days to either pay the amount demanded or bring an application to have the Statutory Demand set aside.
A failure to pay (or apply to have the Statutory Demand set aside) within this time gives rise to a “presumption of insolvency”, enabling the creditor to bring a winding up application.
This procedure should only be considered if there is no dispute about the debt. The pros and cons of issuing a Statutory Demand will be the subject of a later, more detailed blog post.
Issue legal proceedings: VCAT vs the Magistrates Court
If a letter of demand fails to elicit any response, you may decide to issue legal proceedings at the Magistrates’ Court or the Victorian Civil and Administrative Tribunal (VCAT). VCAT has jurisdiction to hear debt recovery disputes only if they relate to goods and services supplied to or by someone in Victoria. Meanwhile, the Magistrates’ Court can hear the full range of debt recovery proceedings.
VCAT’s application form is not as detailed as a Magistrates’ Court Statement of Claim and is therefore cheaper and quicker to prepare.
Proceeding all the way to a hearing is usually less expensive and quicker at VCAT, in part because less steps are required to be taken than in the Magistrates’ Court.
Unlike at the Magistrates’ Court, parties do not have an automatic right to legal representation at VCAT. Leave to appear is usually granted if the debt is over $10,000 but is not guaranteed.
Under the VCAT Act, there is a presumption against the granting of costs whilst in the Magistrates’ Court, the award of costs is automatic if you are successful at the hearing.
There is no procedure for default judgment at VCAT. Even if the debtor does not respond to or defend the claim, you must appear at VCAT and prove your case.
On the other hand, default judgment can usually be obtained easily in the Magistrates’ Court without the need to appear at any hearing.
What happens after you obtain judgment?
Unfortunately, obtaining default judgment is not the end of the matter. You may need to take further steps to enforce the judgment.
Enforcement options will depend on whether the debtor is an individual or a company and may include: warrant of seizure and sale, garnishee order, instalment order, bankruptcy notice or a statutory demand.
In order to enforce a VCAT judgment, it must be registered in the court in which you wish to enforce that judgment.
Prevent it from happening again
Make sure that your contracts, trade agreements and terms and conditions clearly outline the consequences of a failure to pay and that they provide your organisation with the right to claim interest and costs.
Ensure that your internal processes are solid so debts don’t slip through the cracks. In our experience, the older the debt, the harder it is to recover.
If you have any questions please contact us on (03) 9663 9877 for an obligation free chat.