DOES SOMEONE OWE YOU MONEY?

A LOOK AT DEBT RECOVERY OPTIONS

If someone owes you money, and negotiations or demands for repayment have been unsuccessful, the first step is to obtain a judgment from the Court confirming that the debt is owed.

This involves commencing legal proceedings via a document called a Statement of Claim. This document sets out the details of how the money became owing. Once the Statement of Claim is served on the debtor, they have an opportunity to respond to it by filing a Defence setting out their position on the allegations contained within the Statement of Claim.

If a Defence is filed then the case will proceed to be heard by the Court. Both sides will put forward evidence in support of their case and the Court will make a decision about what is owed, called a judgment. If no Defence is filed after a period of 28 days following service of the Statement of Claim then default judgment can be applied for. Default judgment is a decision about what is owed that is made without the case being heard, on the basis that it was undefended by the debtor.

Once you have a judgment that says the debtor owes you money, you can look into debt recovery options for the judgment debt. There are three main debt recovery options – garnishee orders, writs, and insolvency proceedings. These will be dealt with individually below.

Garnishee Orders

A garnishee order is an order from the Court that allows you to recover the judgment debt from the debtor via their bank account, from a third party that owes them money or holds money on their behalf, for example a real estate agency collecting rent on their behalf, or from their employer.

To obtain a garnishee order, two documents are prepared and filed with the Court, being a notice of motion and a garnishee order. The notice of motion requests the Court to issue the garnishee order, and includes an affidavit outlining the judgment debt, interest accruing on the debt since the judgment was made, and the details of the proposed garnishee order. Within the affidavit, you will need to set out why you believe the proposed garnishee, being the person or company that you want to forward the money to you, holds money that belongs to the debtor.

If the Court orders the issue of the garnishee order, the garnishee order is then sent to the garnishee, and funds commence being deducted from the debtor’s money. The advantage of a garnishee order is that the debtor does not need to be served with a copy of the order or notified of it being applied for. The first time a debtor is usually aware of the garnishee order is when funds start being deducted.

Writs for the Levy of Property

A writ for the levy of property is an order from the Court to a sheriff that allows them to seize and sell personal property belonging to the debtor to satisfy the debt.

To obtain a writ for the levy of property, two documents are prepared and filed with the Court, being a notice of motion and a writ for the levy of property. The notice of motion will include an affidavit supporting the request for the issue of the writ, which details the sum owed, any interest and additional costs accrued, and where the property of the debtor is located.

If the Court orders the issue of the writ, the writ is then sent to the Office of the Sheriff of NSW, which is a government body responsible for, among other things, enforcing Court orders such as writs.

The sheriff will usually approach the debtor and advise them of the writ. The debtor may then be incentivised to arrange payment of the debt, or may apply to the Court to pay the debt via instalments. If the debtor does not take any action to stop the enforcement of the writ, the sheriff will then proceed to tag and subsequently remove the property to be sold. The property will be sold by auction, and the proceeds of the sale will go towards repaying the sum owed by the debtor, and paying the fees of the sheriff. The process of a writ being executed by the sheriff is often lengthy, taking place over several months.

If there is insufficient property to satisfy the debt, and the debt owed is in excess of $10,000.00, you can apply for an order seeking the sale of real property. There are a considerable number of requirements to be fulfilled in order to take this step, and consideration should be given as to whether there are other available debt recovery options before proceeding.

Insolvency Proceedings

Although insolvency proceedings are not designed specifically as debt recovery tools, it is possible to use these types of proceedings to recover funds owed. The insolvency procedure is different depending upon whether you are owed money by a company or by an individual, and is a more expensive option than a garnishee order or a writ for the levy of personal property. Prior to commencing insolvency proceedings, you may wish to issue the debtor with a letter of demand noting that you intend to commence insolvency proceedings, and providing the debtor with a final opportunity to propose an appropriate payment arrangement. You may also wish to make enquiries to determine assets owned by the debtor, to gauge the likelihood of their having sufficient assets to repay the debt owed.

Bankruptcy proceedings

Bankruptcy proceedings are an avenue to reclaim funds owed by an individual. If you have a judgment that shows a person owes you $5,000.00 or more, or several judgments that collectively show the same person owes you $5,000.00 or more, and the judgments are less than 6 years old, you can apply to the Australian Financial Security Authority (AFSA) for a bankruptcy notice to be issued.

Once the bankruptcy notice is issued by AFSA, a copy of that notice, along with a copy of the judgment, need to be served on the debtor. Once served, the debtor has 21 days to pay the debt or propose a suitable payment arrangement. If the debtor fails to satisfy the bankruptcy notice, this is considered an ‘act of bankruptcy’, and allows a creditor’s petition to be filed with the Court, provided this is done within 6 months of the act of bankruptcy. The Court may then make a sequestration order, which is an order making the debtor bankrupt.

Once the company has been wound up, a liquidator is appointed, who will manage the assets of the company, and you may receive a payment from the liquidator in whole or in part of the debt owed.

Winding up proceedings

Winding up proceedings are an avenue to reclaim funds owed by a company. If you have a judgment that shows a company owes you $2,000.00 or more, a statutory demand may be prepared and served on the debtor. A statutory demand is a document demanding payment of the debt, the form of which is specified by the Corporations Act 2001 (Cth). Although a judgment is not specifically required to issue a statutory demand, as an affidavit establishing the debt can be sufficient, a judgment acts to strengthen a claim of this type.

Once served, the debtor has 21 days to pay the debt or propose a suitable payment arrangement. If the debtor fails to satisfy the statutory demand, the debtor company is presumed insolvent, and wind-up proceedings may be issued.

Within the 21 day period, the debtor may file an application to set aside a statutory demand served on them. This may be on the basis that the debtor has an offsetting claim against you, which reduces the debt below the minimum amount of $2,000.00, because the statutory demand is defective, or because there is a genuine dispute about the amount of the debt or the debt itself. If the debtor company is successful in the application to set aside the statutory demand, it may be entitled to recover its legal costs of the application from you.

If the debtor fails to comply with the statutory demand within the 21 day period, you then have three months during which you can rely on the presumption of insolvency that arose though that non-compliance to apply to the Court for orders winding the company up. There are several steps that must be undertaken in preparation for the matter being heard, however ultimately the Court may make an order winding the company up in insolvency.

Once the company has been wound up, a trustee is appointed, who will manage the assets of the company, and you may receive a payment from the trustee in whole or in part of the debt owed.

The potential risks and cost implications associated with commencing debt recovery proceedings can be significant, and it is important that you obtain legal advice before commencing proceedings of this kind.

If you would like to discuss your debt recovery options, please contact:

Andrew Thorpe, athorpe@mtpartners.com.au

Emma Swords, eswords@mtpartners.com.au

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