Debt Collection in the Wake of COVID-19 (Coronavirus)

COVID-19 (coronavirus) has caused global disruption which is now being felt in every Australian business. The Federal Government has made amendments to insolvency and corporation laws to alleviate the financial stress on Small to Medium Businesses. These changes will disrupt the debt collection process.

We outline how the process of debt collection and recovery options has changed and answer questions many businesses and debtors will be asking.

How do I recover money from a customer who refuses to pay?

We have observed an alarming increase in debtors citing COVID-19 as a basis of non-payment.In most, if not all, situations the outstanding monies are well outside a business’s trading terms and the debts arose long before the true impact of COVID-19 locally.

More often than not your debtor may not be directly impacted by COVID-19, they may be using the current climate as a basis to hold onto funds rather than paying their suppliers.

Does my customer have to pay?

The short answer is yes. If goods and or services have been provided in accordance with your agreement, then payment is owed as at the date specified in your invoice (as long as it complies with the overall agreement).

The situation may differ if there is a genuine dispute about the goods and or services provided, or if your client has a valid offsetting claim. If a dispute arises it is important that you immediately obtain legal advice before engaging in further discussions with your client. We have expertise in the are of debt recovery and can promptly provide advice in relation to any alleged dispute or offsetting claim which a client may assert.

What can I do if a customer refuses to pay?

Early intervention is key in debt collection. It is important that you immediately obtain legal advice about the options available to you in relation to debt recovery and act on that advice.

Recovery of money owing is usually starts with a solicitor’s letter of demand. It is an effective tool which shows that you take the debt owed seriously enough to engage external assistance. More often than not, a letter of demand will result in negotiations with your debtor which result in payment. If your debtor does not respond, Magistrates’ Court Proceedings may be commenced to recover debts owed.

Magistrates’ Court Proceedings are necessary where the debt owed is under $100,000. If the amount owed exceeds $100,000 proceedings would need to be commenced in the County Court of Victoria. Once your customer is served with a Statement of Claim they will have a limited time to either resolve the matter with you or file a defence (where there is a genuine dispute). If they ignore the proceeding you will be able to obtain default judgment against them, and may proceed to enforce the judgment.

Prior to the COVID-19 pandemic, an effective means of recovering debts owed by a company was to issue a Creditor’s Statutory Demand for Payment of Debt where a debt over $2,000 was owed. The demand would compel the company to either make payment of the amount within 21 days, or make an application to the Supreme Court of Victoria to set-aside the demand.

The amendments to insolvency and corporation laws have increased the debt threshold to $20,000 and extended the time to make payment or make a set-aside application to 6 months making the Creditor’s Statutory Demand an unviable option.

In light of the above businesses are now, more than ever, resorting to legal proceedings as a means to recover debt. This shift will inevitably inundate the Courts and cause a backlog of recovery matters in the coming months. In order to ensure that your debt is recovered promptly we recommend that any non-paying customers are dealt with promptly.

To put it simply, the sooner proceedings are commenced the sooner that the matter will either be resolved or determined by a Court.

Do I have to keep supplying a non-paying customer?

Unless the obligation to continue supply is specified in writing you are not obliged to keep supplying your products and services. If you continue to do so you may be increasing your exposure and minimising your prospect of recovery of your debts.

Certain circumstances may warrant a special arrangement being put in place. However, you should contact us and obtain advice on any specific measures that should be put in place to minimise risk.

What if the customer wants to pay by instalments?

Generally speaking, we do not recommend that an instalment arrangement be accepted without the agreement being appropriately documented, ideally with sufficient security to satisfy any debt. We are able to offer advice, negotiate with debtors and appropriately document any instalment arrangement which may be reached between parties.

COVID-19 has impacted my business and I can’t pay my suppliers, what do I do?

If your business has been directly or indirectly impacted by COVID-19, it is important that you proactively deal with the situation. Getting familiar with changing laws is hard as many amendments are being made to rapidly. Knowledge is key to making the right decisions and staying in business and remaining profitable. Obtaining concise legal advice should be the first step that is taken.

Do I have to pay my supplier?

The short answer is yes. If you have been provided with goods and services and there is no genuine dispute you have an obligation to make payment in accordance with the Tax Invoice issued or the applicable trading terms.

If you have signed a Credit Application & Terms of Trade it is important that you immediately obtain advice. More often than not, Credit Applications allow your supplier to charge interest on any outstanding amounts, seek legal costs of recovering the outstanding amount, and in some cases contain a personal guarantee which the supplier is able to rely on to enforce payment.

What happens if I can’t pay?

Your supplier may take a combination of the following steps:

1. suspend your account and refuse to provide further goods and services;
2. charge interest on any amounts outstanding s provided by in their Term of Trade (if applicable);
3. commence proceedings in the Magistrates’ Court of Victoria or County Court of Victoria; and
4. issue a Creditor’s Statutory Demand for Payment of Debt.

If you are unable to pay your supplier, you should obtain immediate legal advice. Appropriate legal advice and early intervention is critical!

Most suppliers like to maintain their business relationships. It is not in their interest to damage or end relationships abruptly. They may also be willing to reach a commercially sensible agreement with their clients which secures ongoing supply while the outstanding debt is being paid by way of instalments.

I have received legal documents, what do I do now?

It is important that you do not ignore any demands or other legal documents you may receive from your supplier. Court documents have strict deadlines for response material to be filed or for the matter to be privately resolved between the parties. For example, the time to respond to a Magistrates’ Court Complaint in Victoria is 21 days. If a resolution is not reached or an Appropriately drafted response is not provided your supplier will be able to obtain Default Judgment for the amount claimed together with interest and legal costs.

Default Judgment is Court order requiring the judgment debtor to pay certain sums to the creditor/plaintiff. This is a legally enforceable document that is used to compel payment.

The amendments to laws due to COVID-19 will not put an end to debt collection it will only delay the process.

Contact Us

If you are experiencing problems either with debtors or creditors contact our office for a confidential discussion.

PCL Lawyers are experts in commercial law and debt recovery. Our team acts for debtors and creditors alike in a variety of industries, we have the experience and facilities to provide you with prompt and concise advice. Contact us today 1300 907 335.

This article is intended to be general commentary on the subject matter. It should not be taken as legal advice or substituted for legal advice. It is critical that you obtain legal advice in relation to your personal circumstances before taking any action.

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