Options for recovery of debts

Even with the tightest credit management policies, unpaid debts are inevitable for businesses that provide credit to their customers.

The most common reasons why debts are not paid are:

• The debtor’s cash flow and resources are such that it cannot afford to pay the debt when due
• Liability to pay the debt is disputed

Many creditors fail to ascertain the reason for non-payment of a debt before commencing the debt recovery process. Smart creditors will investigate the reasons for non-payment and try and address those reasons.

If, for example, the creditor is reasonably satisfied that the reason the debt has not been paid is that the debtor’s cash flow and resources are such that it cannot afford to pay the debt when due, it may be better to enter into a written debt repayment agreement recording the terms of repayment of the debt. As the creditor is usually in a more powerful negotiating position at this stage it is often easier to require terms to shore up the creditor’s position such as:

• A personal guarantee
• A charge or other security
• A third party accepting liability to pay
• Interest provisions

Too many creditors agree to these types of things but do not get them properly documented. Using a lawyer to do this is very important. Often you can incorporate your lawyer’s fees into the amount to be repaid by the debtor.

A great advantage of such an arrangement is that if the debtor later defaults it cannot dispute the original debt because the debt repayment agreement, upon which the creditor would sue, contains an admission of the original debt by the debtor.

If, on the other hand, the creditor is reasonably satisfied that the reason the debt has not been paid is that there is some dispute as to liability or quantum, there needs to be high level communication between the debtor and creditor in an attempt to resolve the dispute. Meeting face to face is far better than sending emails and letters. Sometimes lawyers need to become involved and often it can usual to engage the services of a mediator. Discussions and communications during this process should generally be conducted on a “without prejudice” basis. That means that the contents of those discussions and communications cannot be relied upon in a later Court case. This allows full, frank and open discussion where concessions may be made in a non-prejudicial way.

At the end of the day you are aiming to negotiate an agreement that sets out the terms upon which the dispute is resolved.

Of course, it is not uncommon for debtors to give untruthful or misleading excuses for non-payment of debts and provided the creditor is sure this has occurred, an aggressive collection strategy if often best. This usually would involve engaging in a lawyer to make a written demand and if that fails to achieve a result, issuing a legal process in a Court or Tribunal.

There may also be other strategic reasons why an aggressive collection approach is appropriate.

Creditors must remember that debt recovery through Courts and Tribunals can be expensive (particularly if the claim is defended and the debtor files a counterclaim). An assessment must therefore be made as to whether the debt is worth pursuing having regard to its quantum, risks of non-recovery (due to losing the case or the debtor becoming insolvent), costs of recovery and executive time involved in instructing lawyers and attending court.

Mason Sier Turnbull realises that certainty in legal spend is important for its clients and its Dispute Resolution & Litigation Practice Group will, in an appropriate case, agree to act on a fixed fee basis. This may be for the whole matter that is clearly scoped or a particular stage of a matter.

If you have a debt recovery matter please contact one of our Dispute Resolution & Litigation lawyers for assistance.

Author: Louise Tolson