Debt Recovery in Times of Crisis
It is no surprise that the multiple lockdowns and restrictions imposed by governments due to COVID-19 has caused serious financial strain on many Australian businesses. Although we can now see the light at the end of the tunnel, some businesses are yet to recover and/or are struggling to re-establish their cash flow to keep them trading solvently.
This has a domino effect on the industry, where one business fails to pay their debts on time, thus affecting another businesses cash flow and so on. However, there are ways to help reduce, if not prevent, falling into this pattern.
Your Contracts/Sub-Contracts/Service Level Agreements
Review and understand the following clauses in your agreements, and if they are not there, considering including them or having them reworded to provide you with more assurance and security:
- Payment Clause
- Each party’s responsibilities set out clearly
- Director’s Guarantee Clause – obtaining a director’s guarantee allows you to seek payment from director’s directly should their company/business enter liquidation or voluntary administration
- Penalty Interest Clause – Any delay in getting payments, which can negatively affect your cashflow, means you may be able charge penalty interest to assist bring you back in the green!
- Enforcement Costs Clause – Consider including a cost that allows you to recover any and all costs associated with seeking the debt i.e., engaging a debt collector or legal assistance
- Enforce the agreement where necessary – Remember your agreements are there to protect you and to make the debt recovery easier and structured, don’t shy away from referring to it in your correspondence and enforcing it when you need to.
- Accurate and Safeguarded Payment Claims
- All details, figures and itemization of work is included
- Payment terms reiterated
- Security of Payments Act phrasing included – “This is a payment claim made under the Building and Construction Industry Security of Payments Act 2002 (Vic)”
- Consistency with Invoicing and Reminder Notices
- Have a set time for invoices to be sent out when a certain amount of work is completed or pursuant to your agreements
- Make sure invoices are sent out promptly and on time
- Send out periodic reminder notices so that invoices are continually followed up, and if payment is not received after a set time issue final notices
- Offering Early Payment Discounts
- Offering a small discount on invoices to get them paid sooner is one option you can utilize to help build long-term working relationships with your trades and build trust
- Organising payment plans for larger projects to make sure costs are being met sooner and cashflow is always in the green
- Strategic Supply of Goods and Services
- Do not release goods and materials until payment is received
- Include PPSR clauses in your agreements and enforce them on goods
- Split payments for services, and obtain deposits for work upfront to assist with cashflow
- Do not release compliance certificates etc. for services until final invoices are paid
- Dispute Resolution Avenues
- Follow the attached flowchart to enforce the SoPA in the first instance
- Mediation and/or Arbitration
- Victorian Small Business Commission
Unfortunately, business is rarely black and white and regardless of implementing policies and procedures to ensure payments are made on time, you are bound to cross paths with difficult trades, secretly insolvent companies, or just poorly managed projects. In this instance, it is important to ensure you are aware of your rights and responsibilities to ensure you come out with the maximum return.
- Having automated weekly/fortnightly/monthly reminders sent out assist in making sure debtors don’t “forget” to pay their outstanding invoices
- Sending a final notice assist you when escalating matters
- Making direct contact with the debtors, may help you avoid lengthy legal process and may assist in building a better working relationship
- If all else fails, it’s time to formally put them on notice you are claiming the debt with a Letter of Demand.
- If you are a small business, you also have access to the Victorian Small Business Commission dispute resolution services, which includes arranging a mediation for a small fee
- Take the stress out of chasing the debt and refer it out to a debt collection agency. Some charge fees, whilst others work on a percentage of payment commission
- A positive is that they can register defaults on credit reports on your behalf, which gets flagged when creditors seek loans and credit accounts
- Engaging solicitors to escalate matters is never the favoured approach due to the costs and time involved, however sometimes this is a necessary progression
- Need to remember that you are never guaranteed a favourable outcome, and you will most likely be left with some out-of-pocket expenses that cannot be recouped
- However, simply issuing proceedings can, in some cases, be the trigger to get some debtors to pay
- Regularly check the Insolvency Notices Website. This shows if a company have been issued with a wind-up notice or have entered into voluntary administration or liquidation. You will as see information like the administrators/liquidators’ contact details
- As soon as you have the administrators’ details make contact and negotiate with the administrator for a percentage of debt to be paid or a payment plan and look at entering into a debt agreement
- Once again, the Insolvency Notices Website should be bookmarked on your home screen!
- Request a proof of debt form from the liquidators, so you can formally enter into the pool of creditors
- Attend creditor meetings or request the minutes so you can see, if any, the assets of the debtors against its debts
- Understand you may not get a return at all, and if you do it may be 10c to the $1
If you have questions on any of the above and/or require assistance with managing bad debts, you can get in touch with us via firstname.lastname@example.org or 1300 972 092 or via our Contact Us page at www.constructivelegalsolutions.com.au.
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