Your business has completed the work it was asked to do; you've delivered the goods or performed the services, but your invoice is now well overdue. With the invoice's due date for payment been and gone, what can you do?
This article provides information for Australian businesses on the different avenues for recovering debt.
1. Debt Recovery Tip # One - Talk to Your Client
Never underestimate the power of a good relationship. Even if your client has fallen on hard times (and genuinely wanting to pay your invoice), if you demonstrate empathy and understanding and use the goodwill you have with that client - this can go a long way. At this point (and depending on the reason why your client has not paid your invoice), you may wish to offer a payment plan or other means of managing the debt so that proactive steps are being taken by your client to pay your business.
I cannot stress enough the importance of regular, follow up communication. If your client has a list of accounts payable and your business is the one that's phoning daily and engaging in friendly follow-up, your invoice is more likely to get pushed to the top of the "to be paid" list.
If your client simply wants you to hold tight until they are able to pay, without making any tangible commitment, you should consider:
the reason why they say they cannot pay your invoice on time;
your client's financial position and their payment history;
whether it's likely they are not paying their other suppliers;
whether there are industry or other factors outside of their control which may negatively impact their business;
how your business might be impacted by receiving only some, or none, of the invoiced amount; and
whether there are any genuine opportunities for future business with this client.
2. Debt Recovery Tip # Two - Use Your Leverage
Leverage is a (very!) powerful tool. "Leverage" refers to using a tool that's at your disposal to gain or maximise an advantage for you and your business. Where possible, your business should, at the outset of a particular business relationship, consider ways it can build leverage. This will come in very handy if the business relationship sours later down the track and there are payment issues.
In the case of procuring payment of an unpaid invoice, "leverage" can take many forms, including that your business:
is in physical possession of goods (for which payment is outstanding);
owns the intellectual property rights in deliverables (and your commercial agreement requires that payment is received before any intellectual property rights pass to your client);
supplies business-critical goods or services to your client and has the ability to stop that supply on short notice;
may refer work to your client or be in a position to switch roles from time-to-time (for example, your business becomes the client, and your client becomes the supplier); and
has a good relationship with your client's client (the principal) and your client might be embarrassed were it known they had not paid your invoice on time.
Whatever your leverage, use it wisely. If you've had regular communication with your client and, despite your best efforts, they are not in a hurry to pay your outstanding invoice, you may choose to use your leverage. A polite reminder of the leverage you hold, how it may impact your client's business (without using inflammatory or threatening language) and a reminder that payment of your outstanding invoice will make the problem go away, might be enough to persuade your client to pay.
You can read more about payment terms and leverage here.
3. Debt Recovery Tip # Three - Send a Letter of Demand
Letters of demand are a cost-effective but formal way to start the debt recovery process. A letter of demand will remind your client about the outstanding debt, advise the amount and when it needs to be paid, and put them on notice that if they do not pay the outstanding amount by the specified date, further action will be taken and they may incur additional cost.
To be legally enforceable, a letter of demand needs to contain several things, such as:
State that the letter is written pursuant to Calderbank v Calderbank;
Set out the amount owed, the goods or services the money is owed for;
The date payment is demanded by (and preferably a specific time as well, such as 5pm);
Details of any legal action you will consider taking if the letter is not complied with and payment is not made in accordance with the demand.
It's also help to attach copies of relevant documentation such as a contract, the outstanding invoices and any other relevant correspondence. Further, whatever legal action you threaten to take, do not include items which you are not prepared to act on; otherwise, the demand becomes a hollow threat and can be ineffective to procure payment of your outstanding invoices.
You can purchase a letter of demand template here.
4. Debt Recovery Tip # Four - Send a Statutory Demand
If there is no genuine dispute about whether your invoice is payable, your relationship with your client has soured to the point of no return, and you're not concerned with the broader market perception of your business taking formal steps against its client, you might consider issuing a statutory demand.
A statutory demand is a similar concept to a letter of demand, however it is given under the Corporations Act 2001 (Cth). In particular, a statutory demand is a demand made to a company by a creditor under Section 459E of the Corporations Act 2001 (Cth).
To be entitled to issue a statutory demand, your business must be owed a total (for instance, the total of one or more invoices) of at least $2,000. If your invoice(s) total less than this amount, you are not entitled to issue a statutory demand.
The reason why a statutory demand is a powerful tool is because if a company fails to comply with a statutory demand, a creditor (the person who is owed money) can prove that the company is insolvent.
Under the Corporations Act 2001 (Cth), a statutory demand must:
State the amount of the debt;
Require the company to pay the amount of the debt or secure or compound that amount to the creditor’s reasonable satisfaction within 21 days after the statutory demand is served on the company;
Be in writing;
Be in the prescribed form;
Be signed by or on behalf of the creditor;
Be accompanied by an affidavit that verifies that the debt is due and payable by the company.
A company fails to comply with a statutory demand if it fails to pay the amount demanded within 21 days of the statutory demand being served.
Because a company is presumed insolvent if it fails to comply with a statutory demand, this can trigger breach events in contracts that the company holds. For example, contracts that the company has with other clients may be able to be terminated by those clients, because the company has failed to comply with a statutory demand. In this regard, failure to comply with a statutory demand can (outside the direct impact of being presumed insolvent) cause knock-on effects which may create additional, serious implications for the solvency of the company.
You can find out more about statutory demands here.
5. Debt Recovery Tip # Five - Refer the Debt
Your business may need to allocate resources and overheads to recover a debt owed by a client. One way to minimise these costs to your business, without writing the debt off, is to refer the debt to a collection agency such as Dun & Bradstreet.
Typically, debt collection agencies take a percentage of the amount owed, but only if they are successful in recovering the debt - so you don't pay unless and until an amount is recovered and, although you won't receive 100% of the total amount of the debt, you can allocate your own business' resources to something more valuable.
The possibility of referring a debt to a debt collection agency may be effective in persuading a client to pay an outstanding invoice, because if the debt remains uncollected and additional steps need to be taken by the debt collection agency, the debt may be recorded on the client's credit report. This may impact the client's credit rating and impact their ability to obtain loans or other credit.
6. Debt Recovery Tip # Six - Start Debt Recovery Proceedings
Starting court proceedings is (and should be) the absolutely last resort for any business seeking to recover a debt. That's because debt recovery proceedings require a further additional outlay from the creditor business. Further, there are no guarantees that (even if the outcome of the debt recovery proceedings is successful) you will receive payment from your debtor client. When you speak with a debt recovery lawyer *like me*, they will guide you and provide legal advice about the pros and cons of debt recovery proceedings, taking into account your business' individual circumstances.
Commencing debt recovery proceedings may be the best avenue where your client disputes payment of your invoice. Unlike a statutory demand and referring the debt to a debt collection agency (which may be difficult to progress if there is a genuine dispute regarding the invoice),
Depending on the amount of the outstanding invoice(s), you may need to refer the debt to a tribunal (such as the Queensland Civil and Administrative Tribunal), the Magistrates Court, the District Court or the Supreme Court. The higher the court, the more expensive the recovery is likely to be.
It's also important to remember that, in anticipation of having to expend legal costs defending the claim and a possible costs order, the client may at least be more willing to negotiate the outstanding debt once court proceedings are commenced.
Beware, however, that court documents are generally publicly accessible information. If you don't want your competitors and other clients to know that you are suing a (former) client, commencing debt recovery proceedings may not be the best avenue for your business.
No matter which avenue you choose to take, it's important to ensure you get the right balance between the cost to recover the debt and commercial considerations such as reputational impacts, cash flow and client management.
Want more? Read our recent publication on payment terms.
Author: Farrah Motley | Legal Principal
PROSPER LAW - A Law Firm for Businesses
M: 0422 721 121