Securing a regular cash flow is perhaps the most important element of maintaining a successful business. In difficult financial times, this can sometimes be a challenge. For this reason, having quick, cost-effective debt recovery can be an essential feature of a successful business. This paper will briefly consider some of the important steps involved in the recovery of unpaid debts.
Any debt recovery process should always commence with a formal letter of demand for the payment of the outstanding debt. This demand ought to identify the amount owing, the legal basis on which the money is claimed, and the date by which full payment is expected to be made. While it is not absolutely essential that a demand be sent to a debtor, it is always advisable to do so, as it will preserve the creditor’s entitlement to an order for legal costs, if the matter proceeds to court.
Once the letter of demand has been issued, ideally the creditor will enter negotiations for payment of the debt. However, often that will not be the case, and it may be necessary to commence court proceedings to recover the unpaid money. Debts of up to $20,000 may be recovered through the Summary Court, which has a relatively simple and time-effective procedure. Debts of over $20,000 must be pursued through the Grand Court.
The key to speedy and cost effective debt recovery is the obtaining of judgment at the first opportunity. There are two ways of doing this without a trial: default judgment and summary judgment. Default judgment can be entered when the debtor/defendant fails to enter a defence within the time period prescribed by the court’s rules. Summary judgment will be sought where the debtor has entered a defence, but it can be demonstrated to the court that the creditor’s entitlement is so clear that the defence put forward by the debtor is for delay only.
Whether the judgment is default or summary judgment, the creditor will be entitled to the full amount of the original claim, interest and legal costs.
The issue of interest is an important one. Most agreements which give rise to a debt recovery claim will also contain a default interest clause. This should always be raised in any legal proceedings, so as to ensure that the default interest rate is recovered. Failure to do so will result in the creditor being entitled only to the court’s prescribed rate of interest. This changes from time to time, but is usually 2% above the prime interest rate.
Once judgment has been entered, the most important stage of the debt recovery process commences: enforcement of judgment. This is the stage at which the court’s procedures are used to force the debtor to pay the sum owing.
The first stage is to determine the assets and liabilities of the judgment debtor. If this is not known prior to the commencement of proceedings, the court may issue a direction to the debtor to attend court to be orally examined, and answer questions relating to their assets and liabilities. These questions must be answered under oath.
This process will allow the creditor and debtor an opportunity to discuss the payment of the debt. If the debtor refuses to pay, or no agreement can be reached, then the creditor has a number of avenues available for enforcement. These avenues include such things as the seizure and sale of assets; a garnishee order, which directors any person who owes money to the debtor to pay that money to the creditor; an attachment of earnings, or even a charging order, which creates a security over any significant assets owned by the creditor.
In addition to these processes available under the court rules, bankruptcy proceedings could also be commenced against an individual who is a debtor. Where the debtor is a company, winding up proceedings can also be commenced. Both of these steps have the potential to have very significant impact upon future business activities. Therefore they can be very influential in encouraging payment of a debt.
Some useful precautions which can be taken prior to extending credit to any customer include:
Litigation is not the ideal solution for any business. For this reason, there ought to be attempts to secure a negotiated payment through the recovery process. An open, commercial mind should be maintained throughout. Ultimately, however, some comfort can be taken from the fact that there are processes available, if necessary, to pursue and recovery commercial debts.