For business owners, using the Court process to recover outstanding debt can be a costly and sometimes lengthy process.
It’s important to remember however, lawyers can be successful with recovering debt outside of Court, without needing to take formal steps against the debtor.
Often, effective litigation specialists will take a pragmatic approach to resolving your outstanding debt, but sometimes the only way to recover a debt may be by going through the Court process.
Should you be considering the path of legal action, we have summarised an information sheet provided by the Federal Court of Australia to help business owners understand the legal process.
Make a statutory demand
Making a Statutory Demand is the first step in the legal process, and is a creditor’s formal, written request requiring a company to pay a debt within 21 days of service.
The requirements for making a Statutory Demand are set out in s459E of the Corporations Act and can have serious consequences against the debtor if it is not complied with.
Period for compliance
If a debtor company is served with a Statutory Demand, it has 21 days from service of the demand to either:
(a) comply with the demand (i.e. pay your debt), or
(b) apply to the Court under s459G of the Corporations Act for an order that the demand be set aside.
Any application under s459G of the Corporations Act to set aside a Statutory Demand must be filed with the Court and served on the creditor within 21 days after service of the demand. The 21 day compliance period is strict and no extensions of time can be given.
Challenging a Statutory Demand is a complex area of the law and it is important for a company that has been served with a Statutory Demand to obtain legal advice in order to understand its rights and obligations.
Making an Application for a Winding Up Order
If your debtor has not complied with your Statutory Demand nor applied to the Court to have it set aside within 21 days, the next step in the legal process is making an application to Court to have the debtor wound up.
Within three months of the date of non-compliance, the creditor who served the demand may rely on the presumption of insolvency as the basis for an application to the Court for orders winding up the company.
The effect of the presumption of insolvency is that the Court must presume, subject to evidence to the contrary, that the company is insolvent and should be wound up.
In an application, a creditor should ensure that the debtor company has failed to comply with the Statutory Demand and that a presumption of insolvency is available.
This is important because the Court may dismiss a winding up application that is based on an unsatisfied demand if those proceedings were commenced before, or more than three months after, a presumption of insolvency arose.
If you are successful with your application to have the debtor wound up, the Court will make an order placing the company into liquidation.
The effect of liquidation is that the debtor will typically cease trading, and the liquidator will take steps to sell all available company assets for the benefit of creditors.
In liquidation, your debt will be a claim in the liquidation and the repayment of your debt will be subject to what assets can be recovered by the liquidator.
Any recoveries that are available to creditors in the liquidation are then paid out as priority payments in accordance with s556 of the Corporations Act.
When taking steps to wind up a company, it’s important to be commercial if the debtor is seeking to negotiate the debt owing.
Making an application to have a company wound up can often be used as a way of bringing a debtor to the negotiation table, however it’s also important to bear in mind the time and cost of doing so if the company doesn’t challenge the application and allows you to place it into liquidation.
The likelihood of receiving a dividend in the liquidation will depend on what assets can be recovered by a liquidator. If limited assets are recovered by a liquidator, there is a risk that there will be insufficient funds to reimburse you for the legal costs incurred in making your application.
If you decide to pursue outstanding debts through the Courts, it is highly recommended you speak to a legal professional and understand the risks before proceeding down this path.
To find out more about Debtplacer, our Collection Partners, or the debt collection process more generally, please get in touch with us here and we would be happy to assist.