How to ensure debts are recovered

Creditors not being paid

The strain of the current economic climate is seeing more and more debtors (clients, customers or service users) being unable to meet their payment obligations and in turn making it difficult for creditors (companies or individuals) to stay financially afloat. 

It is important to consider what the desired outcome is when trying to determine the most appropriate debt recovery method. These considerations may include: 

• Who the debtor is – is it a new client, or an established company; 
• What will be the impact on the relationship – does it matter; 
• What the chances of recovery are – how much is known about the debtors financial situation; and/or 
• Is it cost effective/economic to pursue – each recovery option has different costs associated with it).

If you decide to pursue the debt via the Court system, there are a number of steps to take to recover the debt. 

Step one – obtaining a judgment

The initial step in a debt recovery action is to obtain a judgment. Depending on the situation, there are different ways to do this. 

District Court process

The District Court is the most common court for civil dispute resolution. The District Court has jurisdiction to determine proceedings in relation to debt, demand or damages, or the value of chattels claimed for up to $200,000. There are strict timeframes which each party to the proceeding needs to adhere to once the claim has been filed. This ensures that the claim is resolved as swiftly as possible. The proceedings may be discontinued, if timeframes are not followed. 

Summary judgment

The summary judgment process shortens and simplifies a District Court claim. It can be used where the debtor appears not to have an arguable defence to your claim. A common example would be pursuing an individual for an unpaid and undisputed invoice. 

Disputes Tribunal

An alternative route is pursuing the debt in the Disputes Tribunal. The Disputes Tribunal jurisdiction is for disputed claims of up to $15,000 (or up to $20,000 if both parties agree). The tribunal process differs from a formal court process, whereby there are no judges, but rather a platform for parties to discuss the dispute, and for a referee to determine a ruling. Lawyers cannot attend, other than in limited circumstances. Filing fees depend on the amount of the claim. 

Step two – enforcing the judgment

Just because you have obtained judgment, it does not mean you are going to get paid. Depending on the circumstances, an assessment needs to be made as to what the best next step is.

Statutory demand

A statutory demand is a demand by a creditor in respect of a debt owing by a company made in accordance with the Companies Act. Statutory demands can only be issued against a company where there is an undisputed and quantified debt of at least $1,000 owed. Once served, the debtor must apply to the Court within 10 working days to apply to set aside the statutory demand, and if no application is made, the debtor must satisfy the debt (by payment or arrangement acceptable to the creditor) within 15 working days after receiving the demand. If neither occurs, liquidation proceedings can be filed within 30 days. 

Examination and attachment order

An examination is a court inquiry into the debtor’s assets in order to determine what you might be able to recover for the debt owed. The court order requires the debtor to attend and disclose their financial position in full. If the debtor fails to attend, they may be arrested. An attachment order can be obtained during the examination hearing. This results in a direct payment from the debtor’s employer or Work and Income (if they receive a benefit). The aim is to leave the debtor with enough money to support him/herself and his/her family whilst ordering payment towards the debt until it is fully paid. 

Bankruptcy

A creditor can apply to make an individual debtor bankrupt where there is a judgment over $1,000. Once bankrupted, the official assignee will sell any assets of the bankrupt and distribute the proceeds amongst all creditors. 

Charging orders

A charging order is a court order restraining dealings relating to a creditor’s property. A judgment creditor can, without notice, place charging orders on judgment debtor’s property. This is not a direct method of enforcement or debt recovery however, it can be strategically useful to prevent the debtor from dealing with their property without the creditor’s knowledge. 

Company liquidation

As noted above, an application to liquidate must be filed within 30 days of the statutory demand expiring. The application must be served on the company and advertised publicly. As with bankruptcy, liquidation often does not result in recovery of the debt but can be used by creditors to set a precedent. One of the main reasons to pursue a company liquidation is to realise the assets of the company in order to apportion proceeds to secured creditors, who will take priority, and then to unsecured creditors (on a pro-rata basis). 

Deciding on the appropriate method

There are a number of factors to be considered before deciding on the appropriate debt recovery option. Ultimately the creditor needs to take into account what is trying to be achieved by the recovery action. Considerations need to be given to the relationship between the parties, the public precedent that could be set, the recoverability of the debt and time it could take. Finally, a review of current creditor processes may need to be undertaken in order to prevent situations of debt recovery arising. Where this fails, seeking advice on a debt recovery method that is best suited to the relevant situation may be appropriate. 

If you would like further information please contact Daniel Shore on 07 958 7477.