Business debt collection: what are my legal options when a customer won’t pay?

Many businesses struggle with managing cash flow and, in difficult economic times, it is not uncommon for things to reach the point where a customer just won’t pay.

What are the legal options to recover payment?

In very general terms, legal options to seek to compel payment include:

• making a formal demand for payment through a lawyer;
• serving (in relation to a company debtor) a statutory demand under the Corporations Act 2001 (Cth) for payment of debt, as a precursor to liquidation proceedings; and
• court proceedings.

In some industries – for example, the building and construction industry – there may be other options available to recover payments, such as, for example, action under the Building and Construction Industry Payments Act 2004 (Qld).

The right option will depend on the circumstances – and some options may not be appropriate. It is important to get good advice to make the right judgment call on the best approach to take.

Sometimes debt collection can also be about improving your position through commercial negotiation. If a customer won’t pay, in real terms, you have nothing.  And formal legal processes are no guarantee of payment – particularly where the customer doesn’t have capacity to pay. So negotiating terms to get your business into a better position can be worthwhile.

The sort of negotiation options that may be appropriate include:

• putting a formal repayment agreement in place that acknowledges the debt;
• taking security in exchange for time to pay; and
• agreeing to a discount on the basis of immediate payment.

Care needs to be taken with each of these options as, for example, accepting payment where there are issues of insolvency or bankruptcy in play can leave your business exposed if the customer ‘goes under’.

Another option sometimes considered by businesses is engaging a debt collection agent to represent the business to try to recover the debt on a speculative basis – i.e. on the basis that the agent gets a commission from any amount collected.

In weighing up whether to engage a law firm or a debt collection agent asking the following questions might be useful (as well as, of course, considering cost):

• Which organisation is best placed to represent my business? Will the organisation and its approach be consistent with my brand?
• Do I know enough about the organisation – is it reputable and well established?
• What level of information do I want about the process? Do I want regular updates of the interactions with the customer or am I happy to leave things in the hands of someone else?
• What is my exposure to cost or claims from the customer?

Cooper Grace Ward is a leading Australian law firm with extensive experience in debt recovery and commercial dispute negotiation. We have acted for businesses of all sizes in these types of matters and have a solid track record of strongly representing our clients’ interests in a way that suits their requirements and brand.

If you would like further information about these issues or for us to represent your business in debt recovery, please contact the leader of our litigation and dispute resolution group, Rocco Russo on +61 7 3231 2468.