How Do I Collect The Money I Am Owed?

By Philip Colman, Principal, MST Lawyers

In business, it is common practice to give some customers the ability to pay for what they buy at a later date, in other words, giving them credit.  Sadly, it is also not uncommon for some customers to refuse or become unable to pay debts.

In this article, I will refer to the those to whom credit is given as “customers” or “debtors”, and I will refer to the person or company providing the credit as “suppliers” or “creditors”.

For many reasons, ranging from downright fraud to genuine financial hardship, suppliers experience difficulties collecting money they are owed.

Many people say that “prevention is better than cure”.  That is so, but in today’s commercial world this would mean:

• Never giving credit; and
• Requesting payment in advance for all goods or services to be provided.

In some industries, this would not be acceptable, and suppliers would lose existing and potential customers.  That is not to say that suppliers should refuse to give credit to customers who:

• they don’t know;
• cannot establish their creditworthiness;
• have a bad reputation for paying on time, or manufacturing non-genuine disputes; or
• simply give you the impression that they might cause problems later on.

The giving of credit is an indulgence sought by customers and, that being so, a supplier has some power to dictate the rules upon which it might give credit and its terms of trade. 

Getting The Paperwork Right

Customers should “apply” for a credit account.  In so doing, they should complete a detailed credit application with the following:

• Complete information about themselves and their business;
• At least three trade referees; and
• Acceptance to do business with the supplier in accordance with its terms of trade.

The credit application must include the supplier’s terms of trade[1] and be appropriately worded to protect its interests.  I am not a fan of credit applications that refer the customer to a page on the supplier’s website that contains its terms of trade.  I would much prefer the terms of trade to be laid out in the credit application followed by a statement from the customer to the effect that they have read, understood and agreed to the terms of trade, followed by the customer’s signature.  That lessens the chance of a successful argument by the customer that they were not aware of the supplier’s terms of trade.

Where appropriate, particularly when suppliers are dealing with smaller companies, they should insist that the directors of the company provide personal guarantees or other securities.

Once the supplier receives the application for the credit account before it supplies any goods on credit, the supplier should do the following:

• Check the credit application to ensure it has been correctly completed and, if not, have it redone. Credit applications are often filled out incorrectly or signed incorrectly.  Suppliers should look out for the following:
  • Is the customer described properly?  The supplier might be given a business or company name that does not exist, or the customer may be described as the XYZ Trust (trusts are not legal entities);
  • Are the ACNs and ABNs correct?
  • Have unauthorised employees of a company signed the application on behalf of the company?  It is always best to insist that a proprietor or director sign the application; and
  • Are the right signatures in the right places?
• A full credit check of the customer and any person from whom the creditor requires a personal guarantee – the credit check will entail ASIC and Personal Property Securities Register (PPSR) searches, and it needs to be carefully considered once received;
• Telephone calls to trade referees provided by the customer to ascertain the customer’s payment record;
• Perhaps some telephone calls to other businesses who the supplier believes may have supplied goods or services to the customer to ascertain the customer’s payment record; and
• If a decision to provide credit is made:
  • Setting a credit limit; and
  • Informing the customer of the application approval along with the amount of the credit limit.

It is only at this point that a binding agreement setting out the terms upon which the supplier will provide credit exists.

In many cases, terms of trade have the effect of giving the supplier a security interest over some or all of the assets of the customer.  This could be worthless if the security interest is not correctly described and registered on the PPSR.  The correct lodgement of these registrations is therefore critical.

Terms of trade should allow for:

• The charging of a reasonable rate of interest on overdue accounts; and
• The charging to the customer, legal fees and other collection costs incurred by the supplier as a result of payment defaults.

Suppliers must be careful to ensure that their terms of trade do not offend laws relating to unfair contract terms contained in part 2-3 of the Australian Consumer Law[2].

Sometimes customers seek to impose their own terms of trade on the supplier (terms that favour the customer and are unfavourable to the supplier) by including them on their orders.  The argument the customer might run will be that if the supplier accepts the order and supplies goods and services, the customer’s terms of trade will apply to that order in preference to the terms of trade in the credit application.  The supplier should do two things to overcome this eventuality:

• Firstly, the supplier’s terms of trade should state that they prevail over any terms of trade contained in any order placed by the customer; and
• Secondly, the supplier, upon receiving such an order, should respond to the customer pointing out the above provision and stating that it will only fill the order on the basis that the supplier’s terms of trade prevail.

That will then throw the onus on the customer, if it does not like the response, to cancel the order.  This rarely happens, and therefore the supplier has won, what lawyers call “the battle of forms”.

Dealing With Customers Who Do Not Pay

Sometimes customers (debtors) simply cannot pay you when money is due, and the reasons for this are far and many. For example, the debtor may themselves have experienced cash flow problems due to one of their customers not paying them or a downturn in the market in which they operate.  Alternatively, the debtor may simply be dishonest; ripping money out of the business for personal benefit and leaving nothing for creditors.

Instalment Arrangements

If you choose to work with a debtor and allow them to repay the debt over time, it is important that you formally document this arrangement in an instalment agreement[3] that, at the very least:

• Incorporates into the debt amount:
  • Debt collection costs and the costs of drafting the instalment agreement; and
  • Interest to date;
• Contains admissions of the debt amount that incorporates the above items;
• Sets out a clear and unambiguous instalment plan;
• Provides that if there is a default in the instalment plan the whole of the amount then owing shall become immediately due and payable;
• Provides for the ongoing accrual of interest; and
• Where appropriate, provide for additional security.

Monitoring compliance with instalment agreements is important.  A supplier may wish to do this themselves or engage lawyers to do so. 

It does not hurt to send reminders to your debtors a few business days before an instalment payment is due. Suppliers should certainly be advising customers if they are late making an instalment payment the next business day after the payment is due.  If the supplier does not do so, the customer will think the supplier is slack and may take advantage of the situation.

Legal Action To Recover A Debt

Unless otherwise instructed, MST Lawyers’ initial approach to debt collection is to try and communicate with the debtor before instigating either of the formal processes below.  This will be done by a telephone call where we will advise the debtor that you have instructed us and explain the consequences of the ballooning of the debt if any of the formal processes are undertaken.  Surprisingly, many debtors suddenly realise that our clients are serious and the matter is promptly resolved.

If the debtor cannot pay because they are owed or are about to be owed money by a third party, a tripartite agreement under which the third party makes a direct payment to the creditor can be explored.

But if that fails the following avenues are open to creditors:

• If the debt is more than $2,000 and the debtor is a company, a creditor’s statutory demand under the Corporations Act (Statutory Demand) should be considered if there is no genuine dispute as to the existence of the debt and/or the debtor does not have an off-setting claim.

Once served, the Statutory Demand places the onus on the debtor company within 21 days to either:

• Pay the amount demanded;
• Enter into some compromise agreement with the creditor; or
• Apply to the Court to have the demand set aside (this is an expensive process for the debtor company, and it will have to show that there is a genuine dispute as to the existence of the debt and/or that it has an off-setting claim).

If the debtor company does neither of the above things within 21 days, it will be deemed to be insolvent.  This means:

• The creditor may apply to a Court for an order that the debtor company be wound up and a liquidator appointed; and
• Ongoing trading by the debtor company will involve the directors of the company:
  • Committing an offence under the Corporations Act; and
  • Exposing themselves to personal liability for debts incurred while the debtor company is insolvent.

Companies that receive Statutory Demands and their directors usually take them seriously.  More often than not, this leads to either payment of the debt or a firming up of the creditor’s position through some payment arrangement.  But, in some instances, companies who do not care about their future will ignore Statutory Demands and see whether a creditor seeks to have them wound up.

• Issuing debt recovery proceedings in an appropriate State court.  Once the proceedings are served, the debtor will have a period of time (not usually more than 21 days) to file a document setting out the basis of the debtor’s defence.  If they don’t do this, the creditor can obtain a default judgment for the debt, interest and costs, simply by proving service of the proceedings.

Most debt recovery proceedings are not defended.

But in the small number of cases that are defended, the receipt of the debtor’s defence will allow the creditor to consider whether it has any merit and consider compromises.

Throughout these formal processes, we try to maintain contact with the debtor.  We see our role as maximising our client’s return after payment of legal fees. The advice we give our clients will have this goal always in mind.

MST Lawyers’ Dispute Resolution and Litigation team offer a practical and cost-effective approach towards collecting debts.  We are often able to provide fixed costing for stages of work so that our clients fully understand the costs of moving forward.

Please email us or call +61 3 8540 0200 if you would like assistance in this area.

[1] MST Lawyers have very experienced lawyers in our commercial team that can draft credit applications and terms of trade for its clients.

[2] MST lawyers can advise in relation to the unfair contract term laws.

[3] MST Lawyers have very experienced lawyers in our dispute resolution and litigation team that can draft such instalment agreements