How to recover your Debts

With the End of Financial Year 2021 fast approaching, we discuss how to practically recover your overdue debts in the construction industry. These debt collection methods include:

• Letter of demand (Internal or Solicitor’s);
• Registering credit defaults;
• Statutory demands; and
• Claims under the Building and Construction Industry Security of Payment Act 2002 (SOPA).

Letter of Demand

A letter of demand is a formal demand for payment and generally sets out the consequences of non-payment, which is usually legal action. A letter of demand can be issued by the creditor or from a solicitor.
Below are the pros and cons of a Solicitor’s Letter of Demand.
Suitable for:Small debts, or as a first step

PROS

“Threatens” the debtor and can scare them into paying you immediately.

Fairly cheap.

Written proof that you have tried to settle the matter amicably.

Sometimes a necessary step before proceeding with legal action and/or credit defaults

CONS

It does not ‘force’ the debtor to pay.

The cost for issuing a letter of demand is not recoverable from the debtor.

If the debtor does not pay, additional costs will be incurred.

Registering Credit Defaults

You can register a credit default if the debt is more than $150 and more than 60 days overdue. Prior to registering the credit default, you will need to prove that you have tried to recover the debt by sending a letter of demand and allowing the debtor at least 14 days to make payment.

Suitable for: Small, undisputed debts; or As a first step

PROS

“Threatens” the debtor and can scare them into paying you immediately.

Fairly cheap.

Written proof that you have tried to settle the matter amicably.

Sometimes a necessary step before proceeding with legal action and/or credit defaults

CONS

It does not ‘force’ the debtor to pay.

The cost for issuing a letter of demand is not recoverable from the debtor.

If the debtor does not pay, additional costs will be incurred.

Statutory Demands

A statutory demand is a formal demand for payment of a genuine debt owed by a company and issued under the Corporations Act 2001 (Cth). The debt must be in the prescribed form for debts more than $2,000 and usually accompanied with a supporting affidavit.

As there are serious cost consequences, statutory demands needs to be used carefully and strategically.

Suitable for: Undisputed debts; Non-responsive creditors

PROS

Gives the debtor company 21 days to make payment or the “presumption of insolvency” arises.

If the debt remains unpaid after 21 days, then the creditor can apply to wind up (liquidate) the company

An efficient method with serious legal consequences

CONS

If the statutory demand is not issued correctly then it can be “defective” and set aside.

You may need to incur additional legal costs because the debtor has not paid or misunderstood the seriousness of the statutory demand.

Cannot be used if there is an offsetting claim or disputed debt.

Claims under SOPA

SOPA provides a fast and inexpensive process to recover payments due under a construction contract. Outstanding payment claims can be recovered by applying for adjudication or summary judgment.

Suitable for: Disputed and undisputed debts

PROS

Adjudication is a quick and timely process designed to ensure that cash flow is maintained.

The determinations are binding and can only be appealed at the Supreme Court.

There are limited defences that a builder can raise e.g. liquidated damages cannot be considered.

CONS

Strict timelines apply for lodging adjudication applications.

Further court proceedings may be required to enforce the determination if the builder refuses to pay.

Can become quite costly and longer timeframes apply compared to the previously discussed methods.

Key Takeaways

Act fast to recover any outstanding debts.

We specialise in assisting contractors and subcontractors in the construction industry.
Call us to find out how we can partner with you to improve your cash flow and debt recovery.