Your Debt Recovery Questions Answered

The new financial year is a great time for businesses to focus on recovering overdue payments and improve their balance sheet. Our accredited specialist in commercial litigation, Roland Müller, answers ten top questions about effective debt recovery and prevention.

1. What are the most common mistakes businesses make before a debt becomes overdue, and how can they be avoided?

A common mistake is not having the right information and documents such as contracts for services, terms of trade, credit terms or letters of engagement in place before supplying goods or services. Surprisingly often, I also find that the company or individual who owes money was not properly identified before goods, services or credit arrangements were provided. When the right details are not obtained at the start, enforcing payment terms becomes vastly more difficult.

2. At what point should a business stop trying to recover a debt internally and seek legal advice?

Many creditors wait too long before taking decisive action. If a debt is not paid on time, it is far better to follow up promptly and clearly within days, not weeks. If the debt is still outstanding a week or two after the due date, it is time to get help. Some clients only seek advice months after the due date for payment was missed, even when no interest has been accruing. Unless there are very good commercial reasons such delays just undermine cashflow and erode respect for your payment terms.

3. How can a well-drafted contract or terms of trade improve a creditor’s position if a customer fails to pay?

Well-drafted documents properly identify the parties, clearly set out their rights and obligations, specify what security, guarantees and interest rates apply. They typically also provide a clear pathway for the resolution of any disputes and provide a clear pathway for the recovery of debts. Importantly, they accurately document the agreement between the parties and accurately reflect the parties’ day-to-day commercial arrangements.

4. What practical steps should a creditor take immediately after a significant debt becomes overdue?

Firstly, checking that there is a complete set of records regarding the basis for the debt, the supply of goods, services or credit, invoices issued (and evidence that they were issued correctly) and that the correct payment details were provided. Once it is clear that the creditor has done everything they are required to do, they should follow up on payment promptly. If the debtor has simply overlooked a payment and it is a once-off mistake, this can help reaffirm the arrangements to be respected between the parties. If there are other reasons for the failure to make timely payment or repeated problems, a letter of demand may be needed.

5. What factors should be considered when deciding whether litigation is commercially worthwhile?

This is where investing in the right advice can make a difference. While the commercial decision is for the creditor to make, initial advice on how strong the case is, whether there is likely to be an arguable defence or offsetting claim, to what extent any legal costs may be recoverable, how to maximise cost recovery and whether the debtor can be prevented from disposing of assets should all be considered. Sometimes, pursuing one debt can also help encourage others to pay on time. Legal advice can assist creditors to make informed decisions about the viability of pursuing a debt, based on their specific circumstances.

6. How can creditors identify early warning signs that a debtor may be experiencing financial distress or approaching insolvency?

Common signs include multiple or significant late payments, requests for additional time to pay, seeking to characterise payment as being contingent upon the receipt of unrelated funds by the debtor, delaying payment pending replies to last-minute invoice queries or other delay tactics. Other signs include ASIC lodgements regarding the appointment and cessation of administrators or receivers, winding-up applications and adverse credit reports are late signals and require an urgent response. Frequent attempts to refinance or the disposal of assets to fund cashflow are also red flags.

7. What are the most effective legal tools available to creditors for recovering commercial debts, and when should each be used?

Which tools to use depend on timing, the nature of the debt and the known circumstances. A letter of demand can be used to extract payment but can also be used to check for a dispute or seek information about the debtor’s position. A statutory demand can prioritise an undisputed debt but can ‘backfire’ if a genuine dispute arises or is used carelessly as it can be set aside and the debtor may be able to recover their legal costs as a result.

Court proceedings are often most effective if commenced early and steps are taken to resolve the dispute, with pre-judgment interest usually accruing once a writ and statement of claim are filed. A resolution can result in earlier payment with more control over the terms and some unsuccessful attempts to resolve the matter can assist with recovering legal costs.

It is also important to obtain the right help early on. Set up the right systems to make debtor management easy. For some creditors, such as those with high-volume low-value debts or those which have late but undisputed debts, a debt collection service can help, but should be given a relatively short time to recover the debt. For any potentially disputed debts or ones where litigation is likely to be needed, it is advisable to engage a lawyer to issue one clear and detailed letter of demand to support litigation in case it is needed.

8. What about agreeing to let the debtor repay the debt in instalments?

‘Payment plans’ are common but often create problems if done poorly. Creditors should be careful to ensure that allowing time to repay does not prevent recovery of the debt in full if the debtor fails to pay instalments on time. Usually, there should also be an additional benefit to the creditor. For example, security or a personal guarantee, interest, or a more direct way to recover funds than suing for the original unpaid invoices. A well-designed arrangement can benefit both parties. A poor one simply results in the debtor being given more time and flexibility, at the creditor’s expense.

9. How can businesses structure their credit management and debtor monitoring systems to reduce bad debt exposure?

There is no one right answer. Some businesses still rely on checklists, spreadsheets or basic manual accounting. Others use prompts to alert accounts staff to follow up unpaid amounts. Yet others have an entirely automated systems either through their credit management applications or an AI agent. Some outsource the process entirely. Overall, the key is to ensure an active and prompt approach, with priority given to maintaining commercial relationships in which supply and payment terms are respected by the parties.

10. Looking ahead, what emerging trends in commercial litigation and debt recovery should businesses and their advisers be paying attention to?

I see clients continuing to be more active and conscientious about managing debtors. Many come to us after having spent too long waiting for payment or trying to use a debt collector, despite the debt being disputed. Increasingly, I see creditor willing to follow through with court proceedings where appropriate and not be willing just ‘give it a bit more time’ unless there is likely to be a clear benefit to doing so. I also see businesses more willing to cut ties with customers who do not pay on time and to have clearer processes when onboarding and managing customers, to reduce financial risk and ensure a smooth process for managing debtors.