Know Your Legal Options for Collecting Unpaid Invoices
As a business owner it’s crucial that you know exactly where you stand and what your legal options are and what actions you cannot take to collect an overdue invoice when a customer cannot, or will not, pay for goods or services delivered.
Not only do you want to know your options but you’ll want to know how much each course of action may cost you and whether those costs are recoverable.
After all there is no point spending $2000 to recover a $1000 overdue invoice.
First and foremost you should give the debtor clear verbal and written warnings that if the payment is not made by a due date you will be taking legal actions.
This should be done as professionally and courteously as possible to try maintain the relationship if it is still salvageable.
Generally you’ll want to implement these steps before taking further action:
- Contact with a friendly payment reminder
- Contact with an overdue payment reminder
- Contact your customer with a final notice
- Try to make direct contact with your customer (this can also be done earlier in the process)
If these attempts do not get any response from the customer and you still have not been paid then there are a number of legal actions you can pursue.
*Note: If there has been no response or payment after the 4 steps listed above it is advised to seek professional help from a reputable and experienced debt collection agency. These matters can drain a lot of time and energy away from your business once legal steps are considered.
Formal Letter Of Demand:
A letter of demand will provide the final warning before legal proceedings are implemented. This is most effective when sent on a solicitors or debt collectors letterhead and many quality debt collectors now have in-house solicitors.
Professional debt collectors also have other options such as registering the debt against a debtor’s credit rating, which can be another final option before filing court papers.
Filing a Statutory Demand:
A Statutory Demand is a formal written request for payment of debts owed by a company, issued pursuant to Part 5.4 of the Corporations Act 2001 (Cwlth) (‘Act’). The core intention of the legislation is to prevent companies from trading whilst insolvent, and thereby incurring further debts which will not be repaid.[1] It is an initial step in the winding up process.
A company who is served with a Creditor’s Statutory Demand has a period of 21 days to either:-
(a) pay the amount demanded; or
(b) bring an application in the Supreme Court to have the Creditor’s Statutory Demand set aside.
The 21-day period must be strictly complied with and cannot be extended even by a Court.
There are many requirements you must fulfil before serving a Statutory Demand and it is best to seek professional advice before taking action.
Court Proceedings:
If none of the above is effective in recovering your outstanding funds then it may be necessary to undertake court proceeding. Of course this should be viewed as a last resort once all other options have been exhausted.
To file court proceeding you will need the help of a solicitor and it is best to hire one who specialises in debt recovery. Ideally you would want to work with a debt collection company that has in-house solicitors. This way you can be sure all pre-court steps have been take to try to recover the funds, and if that is unsuccessful your solicitor will already be completely up to date with your matter and be able to file your papers quickly and accurately to minimise costs and stress to you.
The other benefit of using a debt collection agency is that before court proceedings, many offer a “No Recovery No Fee Service”, so you will only pay a fee if the money is recovered. If your Terms Of Trade and contract agreements are written correctly these fees can also be charge to the customer.
Frequently Asked Questions
What specific steps should a business owner take before escalating to legal action to ensure they’ve exhausted all amicable resolution options?
A business owner should start with friendly reminders for payment, escalating to a formal letter of demand outlining the unpaid invoices and the consequences of non-payment. It’s also advisable to offer payment plans or dispute resolution to maintain goodwill. Engaging in direct contact can often resolve issues without the need for further legal steps.
How does involving a debt collection agency impact the relationship with a customer, and what measures are taken to preserve business relations?
Involving a debt collection agency signals a serious step towards debt recovery, which might strain customer relations. However, professional debt collectors prioritize maintaining respect and professionalism, aiming to preserve the business relationship as much as possible through constructive dialogue and negotiation.
Are there specific consumer protection laws that limit the actions a creditor can take when collecting unpaid invoices, and how can a business navigate these regulations?
Consumer protection laws indeed set boundaries around debt collection practices, including prohibiting harassment and misleading conduct. Businesses should familiarise themselves with these laws, ensuring their collection practices comply. Seeking professional advice or employing an experienced debt collection agency can help navigate these regulations effectively.
