In brief - Analyse benefit of seeking recovery before commencing proceedings
The Court process in debt recovery proceedings is driven by Court rules and regulations that are specific to each Court and state. That process can be frustrating, especially when you are confident that the debt is owed and the debtor is using the Court procedures to delay payment even further. By giving your legal representatives as much information as possible prior to issuing proceedings and providing prompt assistance during the course of the proceedings, you can help minimise that delay and costs.
Consider cost/benefit, time and chances of recovery before issuing court proceedings
So your claim has been quantified and your demand for payment has been sent and been met with either silence or a refusal to pay. Your next step is to issue court proceedings seeking recovery.
Before incurring the costs of doing so, it is essential to step back and ask the question "What is the benefit of doing so?".
You should :
- obtain an estimate of legal costs from your legal representatives
- undertake a careful costs/benefit analysis as issuing proceedings can be costly
- note that legal proceedings will take time to be resolved. If proceedings are defended it may take up to 12 months (or even longer) to have a final order made. Conversely, if undefended, judgment may be awarded in a matter of months
- understand that you and your staff will need to commit time to assist your lawyers in making the claim
- consider whether the debtor will be "good for the money" if you are successful
You may decide to write the debt off on the basis of the cost/benefit analysis and you may be able to claim an income tax deduction or a goods and services tax (GST) adjustment so that you do not pay income tax or GST on amounts you have been unable to recover from the debtor.
Commercial debt recovery is generally through the Courts rather than Tribunals
So having undertaken that analysis, you have decided to pursue recovery through proceedings.
All the state and territory jurisdictions offer a simple debt recovery procedure for small claims by either Tribunals or divisions within the Courts.
The advantage of using Tribunals is that the process is informal, legal representation is not required, it is less costly and the matter can be dealt with quickly.
However, the jurisdictions of many of these Tribunals is limited to consumer debts rather than commercial debts. Generally, recovery of commercial debt is through the Courts.
Court rules and procedures for debt recovery claims
Unlike many legal TV dramas, the process of obtaining a judgment on a debt recovery claim is seldom glamorous or dramatic! It involves methodically going through a number of steps to ensure that the Court has all the information it requires to make a decision on the case. While each Court and state has its own specific Court rules and procedures, the following nine general steps apply:
1. Determine which Court has jurisdiction to hear your action
Each state and territory has various "tiers" of Courts which in turn have jurisdictional limits as to the claims they may hear. For instance, the Magistrates' Court in Victoria can only hear claims up to $100,000.
2. Ensure that your claim is brought within the statutory time limit
There are time periods restricting when claims can be brought. Again these may vary between jurisdictions. For example, contractual claims in Victoria generally need to be made within six years of the date the contract was breached (although that time may be extended in certain cases, such as fraud).
3. Articulate your claim
It is necessary to set out your claim in a "statement of claim" (or "complaint" as called in some jurisdictions). That will include information as to the circumstances in which the debt was incurred - how much, when, where, why.
The claim will also include reference to the documents which prove the debt (e.g. proof of delivery, invoices).
Your claim is provided to the Court Registry which will then "issue" the proceeding returning it to your legal representative.
4. Serve the claim
It is then necessary to "serve" the claim issued by the Court on the debtor, i.e. giving it a copy. There are rules and regulations which set out the particular requirements for service. These will differ depending upon the nature of the debtor. For example, service on a company by posting to its registered office is adequate, however, personal service on individuals is normally required.
5. Wait for a defence
Following service, the debtor then has time to file its defence to the claim and provide a copy to you. A defence may also be accompanied by a "counter-claim" which is essentially a claim made by the debtor against you which, if proved, can be set off against the claim you have against it.
6. Discovery, subpoenas and interrogatories
If the proceedings are defended, the Court rules provide for the disclosure of relevant information regarding the claim. This includes "discovery" - a process where each of the parties is required to disclose all documents and correspondence relevant to the proceedings and upon which they intend to rely or other parties may rely. While these documents may not necessarily always be favourable to your claim, the Court rules and the obligations imposed on parties who choose to litigate their claims require all relevant documents to be disclosed. You are required to list those documents, usually in an affidavit which also requires you to positively state that they are the only documents in your possession or control which are relevant to the proceeding. Each party is then entitled to look at those documents and obtain copies of them.
There may also be other documents which neither party has but which may be relevant to the proceedings. Parties may issue "subpoenas" compelling production of those documents. For example, bank records may be relevant and a subpoena issued to the bank compels it to produce the documents listed in the subpoena to the Court by a certain time. Once produced to the Court, the parties are then able to inspect and copy those documents.
In some instances parties may serve "interrogatories" on another party. These are a series of questions designed to limit the issues in dispute between the parties and which the party served is required to answer on oath through an affidavit.
In a simple debt recovery action, the process of discovery is likely to be relatively simple and interrogatories will not be required. However, the discovery process can be arduous in more complex actions.
7. Preliminary hearings
The Court will often fix a pre-hearing conference or directions hearing. A pre-hearing conference is an informal conference between the parties and the Court Registrar to clarify the issues in dispute and promote resolution.
Directions hearings will determine whether procedural matters are being complied with and fix dates for their completion. For instance, it may be necessary to apply for further discovery from the debtor if you believe it has documents which have not been disclosed that are relevant to the proceeding.
This step is combined with step seven in some jurisdictions.
All Courts encourage the parties to seek resolution of disputes prior to the final hearing and will normally require the parties to attend a "mediation". An independent third-party mediator (either chosen by agreement of the parties or Court appointment) will meet with the parties and their representatives and assist them to try and reach resolution. The mediator does not adjudicate the claim but acts as a facilitator. A mediation is always conducted "without prejudice" to the rights of the parties to pursue their claims should the mediation fail.
If the mediation fails, the matter will go to a final hearing or trial.
At the trial you will be required to prove your claim. This may involve you giving oral evidence in the witness box about the circumstances of the debt. You may be cross-examined on your evidence by the debtor's legal representative. The judge or magistrate may also ask you questions to clarify matters.
After the Court has heard all evidence, submissions and arguments made by the legal representatives of the parties, it will often "reserve" its decision to allow it to consider all of these matters before delivering its judgment.
Your legal representatives will be notified once the judgment is delivered.
The Court process can be lengthy and if the matter goes to trial, your case may not be dealt with for over 12 months after it has been issued, depending on the complexity of the claim and defences and on the time available for the Court to deal with it.
What if the proceeding is undefended or if there is no legitimate defence?
If undefended or if the debtor admits your claim, judgment for the amount claimed together with an allowance for legal costs and interest can be entered.
Legal costs are claimable but are fixed amounts
If you are successful on your claim, an order will normally be made that the debtor pay your legal costs of the proceedings. The Court rules in each jurisdiction set fixed amounts claimable for legal costs. Those rates never equate to the actual amounts charged to you. So even if you are successful in obtaining judgment, you will not be entitled to recover from the debtor all of the legal costs incurred by you.
So you have obtained judgment - what next?
The next article in this series will deal with measures to enforce your judgment.
Read our first article in this series: Effective debt recovery starts with identifying your debtor
Read our second article in this series: Quantifying your claim when recovering debt