In this article, we examine:
- Preparation – increasing your chances of recovering a debt
- B2B debt recovery using third-party debt collection services
- Using lawyers for B2B debt recovery
- Self-help for B2B debt recovery
- Should I pursue B2B debt litigation?
- Should I begin bankruptcy or winding up proceedings?
- How to settle the debt?
- Key advantages of a Debt Recovery Lawyer
- Key Takeaways
Preparation – increasing your chances of recovering a debt
Ideally, all creditors should be focused on avoiding the need to recover a debt in the first place – you need to make sure your legal arrangements are optimised to manage your credit risk. Offering credit to a small-to-medium sized enterprise (‘SME’) carries a relatively high level of credit risk, so your contractual documentation needs to provide an appropriate level of legal protection.
It is important that you get in writing all matters relating to the application for credit. In order to be prepared for any legal action that may result, and to reduce the chance of needing to pursue legal action, your documentation needs to include:
- the customer credit application itself;
- any customer quotes;
- purchase orders;
- consignment invoices and terms of trade;
- credit notes; and
- emails to the customer containing representations or agreements.
The most important document is the customer credit application. So, what do you need to ensure you include in this document? Some key elements to consider are:
- The Applicant’s name must be clearly identified with an Australian Business Number (‘ABN’). Otherwise, you may find that their trading name is not registered;
- A personal guarantee for all directors. Acquiring a personal guarantee for all debts incurred, from directors themselves, is useful protection when dealing with debtors with a small potential asset base. In addition, this mitigates against the risk of ‘illegal phoenix activity’ where directors move assets out of a company, for less-than-fair market value, before liquidating;
- A Purchase Money Security Interest (‘PMSI’). This is a security interest in the debt that you can register on the Personal Property Securities Register. This can entitle you to reclaim goods supplied to a customer, and also gives you priority over ‘unsecured creditors’ in the case of liquidation. Note, that this may not be of help if the goods are already sold prior to liquidation;
- Cost Indemnity. B2B debt recovery costs can be significant. You will need an indemnity in your consumer credit application, to ensure that you can recover all these costs;
- Interest. Ensure that this is contained in the consumer credit application to entitle you to recover interest on any debt, before legal proceedings are pursued;
- Privacy and credit information disclosure. It is possible that you are classified as a ‘credit provider’ under the Privacy Act 1988. This requires you to adhere to a range of requirements under that Act and the Privacy (Credit Reporting Code) 2014, including informing the debtor if you will be disclosing information to a credit reporting agency;
- Exclusive jurisdiction clause. To ensure that you don’t have to meet the costs of pursuing legal action in another state or territory, ensure that your agreement includes all parties to submit to exclusive jurisdiction of the courts in your home state or territory.
B2B debt recovery using third-party debt collection services
If a debtor is significantly late on the payment of their debt, what next? In these circumstances, it is common for businesses that are owed money to use a third-party debt collection business in an attempt to recover that debt. In Australia, there are various types of third-party debt collecting business. Key types of debt collector include:
- Contingent debt collectors. This is the most common form of debt collecting business in Australia. Here, the creditor refers the debt to a third-party business, to collect the debt on the creditor’s behalf. This is usually done on a commission basis, but other models exist as well (such as a ‘fee-for-service’, based on a certain number of recovered debts);
- Debt purchasers. Debt purchasers, sometimes also referred to as debt acquisition businesses, purchase the debt from the original creditor. Often, creditors have an ongoing ‘forward flow’ arrangement with a debt purchaser to pass on debts, or a bundle of debts, after a certain period of time of non-payment.
- Mercantile agents. These agents have unique powers to sell, pledge or otherwise dispose of goods and can sue on a contract for the sale of goods in their own name. Mercantile agents provide a range of services, including:
- Serving legal documents;
- Locating debtors;
- Face-to-face field calls with debtors, and;
- Asset recovery and repossession.
There is some degree of overlap between contingent debt collectors and mercantile agents. In New South Wales, for example, the law treats them both equally and requires them to hold a master licence or operator licence. In Queensland, a distinction is made between ‘collection agents’ and ‘field agents’ (that latter generally being mercantile agents) under the Debt Collectors (Field Agents And Collection Agents) Act 2014. Each type of debt collector requires a separate licence in that state.
For more information on how third-party debt collection services work, see the 2015 report commissioned by the Australian Competition & Consumer Commission (ACCC) Research into the Australian Debt Collection Industry.
Using lawyers for B2B debt recovery
Some law firms (such as ours), that focus on business law also offer debt recovery services to their clients to complement their legal advisory function. When deciding if a lawyer is best to help you with a B2B debt recovery claim, it is important to consider their experience in debt and their relevant knowledge and expertise in the laws surrounding debt recovery for businesses. We consider the benefits of consulting a specialist debt recovery lawyer in more detail below.
Self-help for B2B debt recovery
The third option for creditors attempting to recover a B2B debt is to pursue the debt themselves. Note that there is a risk for businesses that aren’t experienced in debt recovery that their approach may be interpreted as unprofessional, or legally improper. As well as harming later attempts by professionals at recovering the debt, this may result in legal liability. For example, you may be liable for misleading conduct if you state that the debtor will incur your legal costs where this was not specified in your customer credit application or otherwise permitted under the law.
If your business is chasing up a debt personally, it is important to remember several things:
- Be polite and professional – although you may feel cheated out of money owed to you, the goal is recovering what you are owed. Debtors generally won’t respond well to threatening behaviour or ‘strong-arm’ tactics. In addition, you may want to leave the option open to preserve that business relationship;
- Be consistent – implement a system of invoicing and debt reminders, and stick to it. This avoids confusion about what is owed to whom, and when payment is due;
- Keep clear and accurate records – it is crucial that you have clear and up-to-date records of the B2B debt owed, especially if legal action is to result. Ensure that you keep financial records, as well as records of any communication between the parties involved.
Should I pursue B2B debt litigation?
You may have pursued traditional debt collection already, or you may be wondering about the possibility of pursuing legal action straight away. Here are some of the matters that you need to consider when looking into this option:
- Lawyers tend to charge fixed scale costs for process work, and hourly rates for bespoke work: In addition, they generally have an obligation to be upfront about their pricing. You need to have the discussion with a lawyer early on about the costs involved. Where lawyers offer a ‘no collection, no fee’ service, tread carefully. Commonly, these lawyers don’t put sufficient effort into complicated debt collection, as they are unsure about the potential returns;
- In light of the costs involved, it will usually be uncommercial to pursue legal action for debt recovery unless that debt is significant (as a general guide, recovery of a debt less than $20k is unlikely to make commercial sense);
- Due to the Government’s response to COVID-19, it is currently more difficult to pursue legal action against debtors. The most common form of beginning a legal process for debt collection, issuing a statutory demand for payment of debt, now requires a threshold debt or $20,000 and a six-month delay between issuing the statutory demand and pursuing court action.
Should I begin bankruptcy or winding up proceedings?
The most common way of initiating winding up/liquidation proceedings is to issue a Creditor’s Statutory Demand under 459E of the Corporations Act 2001 (Cth). Usually, companies served with a statutory demand have 21 days to apply to have it set aside. If the statutory demand stands and it is not paid within 3 months, the company will be deemed insolvent.
Note that, temporarily, in response to COVID-19, companies now have six months to respond to a statutory demand, and the amount that must be owing has increased from $2,000 to $20,000.
Another possible option for initiating winding-up proceedings is with a ‘statement of claim’. This does not need to meet the debt threshold of making a statutory demand for payment of debt. However, it does require that the creditor prove insolvency, which can be difficult to do.
At any time, initiating winding up proceedings against another business should be the nuclear option – a last resort to recover the debt after other methods have failed. There are several reasons for this:
- Liquidation in Australia generally has poor outcomes for unsecured creditors. There is a decent chance you will end up with nothing or only cents on the dollar;
- You will cause irreversible damage to the debtor business. Liquidation proceedings carry considerable stigma in Australia. By taking this step, and it becoming public knowledge that this step has been taken, you will make it much harder for that business to continue trading or to recover in some other way (such as through a restructuring). Ultimately, hurting the debtor’s business will damage their asset base and your own chances of recovering anything in a liquidation.
- Initiating any form of legal proceedings is inherently costly.
This does not mean that you should never pursue winding up proceedings. Rather, you should only consider this after you have tried other options, and only where the debtor is well capitalised or has significant collateral.
How to settle the debt?
Before litigation commences, it is important to consider how you might use legal options available to you to settle the debt. Important options include:
- A deferred payment arrangement. If taking this step, it is best to have a judgment debt in hand. The second-best option is to come to a ‘deed of settlement’, with the debtor about debt repayment;
- Seek to recover on collateral. Use this option if you have a mortgage against a director’s property, for example, or if you have a personal guarantee against directors to enforce.
Key advantages of a Debt Recovery Lawyer
In looking into recovery for any significant B2B debt, it is worth reaching out for legal advice. There are two key reasons why it can be important to talk to a specialist debt recovery lawyer at this stage:
- They possess the most complete knowledge of the legal framework for debt collection and enforcement. They can advise on the full suite of options available to you, such as registering a security interest on the PPSR, essential contractual provisions and the pursuit of litigation.
- Lawyers have strict professional and legal obligations to any client – They provide advice with the creditor’s best interests at the forefront of their minds. By contrast, other debt collection actors have no such obligation and may be inclined to recover their fee, no matter what the cost.
- All businesses that provide goods or services on credit should ensure that their credit application process protects their position in the case of non-payment, as much as possible;
- There are various professionals and businesses that can help with B2B debt recovery, including specialist lawyers;
- Litigation or winding-up proceedings are costly and are likely to be uncommercial for B2B debts in most cases;
- Consider settling any debts if possible;
- If in doubt, consult a B2B debt recovery lawyer.