Legal proceedings to recover a debt should be a last resort
Unfortunately a significant proportion of small and medium businesses are dealing more and more with issues of cash flow, global economic uncertainty and a lack of demand, non-payment of debts can destroy a business. It is important to know the legal process that you can follow if someone owes you money.
Try to avoid legal action if you can
It is often cheaper and more practical to try to negotiate a payment plan under which the debt can be paid off in instalments, rather than to bring legal proceedings. This can also be the best method to maintain what in the long run may be a profitable trading partner, customer, or even friend.
Interest and any legal costs incurred to date are often included in repayment agreements, so that the creditor will eventually be put back into the position they would have been in if the debt had been paid when it was due.
Always have written evidence about the debt
The paper trail is significant in the eyes of the law. So before you do anything, make sure you have written evidence. This can be in the form of a contract, an invoice, correspondence, even a scrawled note on the back of a napkin, anything that suggests an obligation on the part of someone to pay you in return for providing of goods or services.
If you don’t have anything in writing, send a friendly email to the debtor worded in such a way that they might reply acknowledging that the debt exists.
Once you have such evidence, it is strongly advisable to have your lawyer send a “letter of demand” to the debtor stating how much is owed. Give them a time in which to respond before seeking to commence proceedings. Using a lawyer will show the debtor you are serious about getting your money back.
Starting legal proceedings to recover the debt
If the letter of demand is unsuccessful, the next step may be to take legal proceedings. However legal proceedings often involve significant legal costs and fees.
A statement of claim setting out the information of the debt will need to be prepared and served.
The debtor may choose to file a defence. If they do, the matter will then follow a particular process towards a hearing. This will involve the preparation and filing of evidence. Then there is usually at least one pre-trial conference and likely attempts to settle the matter.
If 28 days pass without any sign of a defence, then you can proceed to the next step which is judgement by default.
You need a notice of motion to be filed to receive a default judgment. The preparation of this will again involve legal costs, but there is no filing fee and it does not have to be served. The matter is then listed before a Registrar, who gives judgment in usually a week.
Enforcing a judgment
Once you have a judgment against a debtor (whether by default or after a trial), there are a number of enforcement options available to you, though you should keep in mind the old saying that you can’t get blood from a stone. You can get an order from the Court for a sheriff to seize the debtor’s tangible property and sell it. You can also get a garnishee order which you can serve on third parties that owe the debtor money so that their debt is instead payable to you. These can be served on banks or even employers.
Do you bankrupt or liquidate?
You also have the option of bankrupting the debtor if they are an individual, or lodging a creditor’s petition to have a company wound up if they are a company but only if the debt is for more than $2,000.
When this happens, either a trustee or a liquidator may be appointed over the person’s or company’s property. The trustee or liquidator may then sell assets or collect income to pay back the debt. Unfortunately, the creditor rarely receives their money back in full in either of these situations and maybe nothing at all.
Negotiation is better than litigation
A creditor needs to understand the nature of the process so a judgement can be made on what may be gained against what may be lost. It is probably much easier and better to negotiate if at all possible and treat legal proceedings to recover a debt as a last resort.