Give me my money!

Debt collection is a vital part of business. Delays in payment have an impact on cash flow and it’s therefore critical your debt collection process is efficient and effective

The process starts immediately when you form a relationship with the debtor. The terms on which you contract with the debtor can later affect proceedings when you try to recover any outstanding debt.

Every contract should be tailored to your particular business needs – one size does not fit all.

Regardless of the nature of your business, your contracts should be clearly written to avoid disputes over what was agreed. You should consider the following issues when preparing your contracts:

• Is the other party accurately recorded in the contract? Is the other party a company, a trust, an individual trading under another name or an individual? Make sure the name of the contracting party
  is correct.
• Be specific about the goods or services that you are providing. If there is any limitation on what you are providing, state that clearly in the contract.
• Be clear about the price of the goods or services you’re providing, or how the price is to be calculated if a formula is used. What does this price include or exclude?
• Are the risk and insurance clauses, and retention of title clauses, appropriate and enforceable?
• Consider whether to limit or exclude your liability for products or services to the extent that you are able to in law (there are some obligations in law that you cannot contract out of).
• Check that there is a clause in the contract allowing you to charge interest on overdue accounts. Recording on invoices or statements that interest will be charged on overdue accounts may not be enforceable. Ensure that the method of calculating the interest is simple to apply.
• Where the debtor is a company or a trust, get a personal guarantee from a director or trustee.

It’s important that you review your contracts regularly to ensure they are up to date. Include any changes to the law or any changes to your business practices.

The contract should be signed by the other party before the goods or services are provided. This avoids any disputes about whether the terms of the contract apply.

After the contract is signed, make sure that you:

• Register any security interest on the Personal Property Securities Register (PPSR).
• Manage the contract tightly and proactively – do not let overdue accounts sit dormant for long periods.
• Record any variations to the contract terms in writing.

If you are having difficulty recovering a debt, the first step is to communicate with the debtor – why are they not paying and should you continue to provide them with goods and services while the debt is outstanding?

Before pursuing the debtor, you should check to see whether they have any assets or other means of paying. Find out if they own any property and
check the PPSR to see if any creditors have a security interest over their property.

If there is a dispute over an amount sought in a payment claim, and if the reasons for not paying for the claimed amount have been included in a valid payment schedule, the adjudication procedure in the CCA can be used.

Recovering debt from individuals

If the debt is disputed, you can file a claim against the debtor in the Disputes Tribunal for claims under $15,000 (or up to $20,000 if the debtor agrees). If the debt is not disputed, you cannot file your claim in the Disputes Tribunal.

If the debt is under $200,000, you can file a claim in the District Court. If the debt is over $200,000, you will need to file a claim in the High Court. If the debtor does not file a statement of defence within 25 working days of being served with the statement of claim, you can apply for default judgment.

Once you have obtained judgment against an individual, you have several options:

• Obtain an attachment order to salary or wages for the debt to be paid in instalments.
• Obtain a charging order over property owned by the debtor.
• Obtain a sale order in respect of the debtor’s property.
• Apply to bankrupt the debtor.

Recovering debt from a company

If a company owes you an outstanding debt, the first step is to serve a letter of demand. If that letter of demand is not complied with and the debt is not disputed, a statutory demand can be served on the debtor, which requires payment to be made within 15 working days.

If the statutory demand is not complied with, you can apply to liquidate the company. If the debtor is a company, you should also look to pursue the guarantor in respect of the debt.

Collecting your debts promptly after issuing invoices results in healthy cash flow. It is essential to ensure that your processes are effective right from the beginning of the contract to the debt collection process itself.

It’s important to remember that clear and well-written contracts combined with good communication are essential to the debt collection process.

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The information in this article is intended as a general guide only and is not intended to be legal advice.
Detailed advice should be obtained to cover a specific situation.

MELISSA BORCOSKI

Melissa is a partner at Saunders Robinson Brown and is the team leader of Saunders Robinson Brown’s Litigation Team. Melissa specialises in commercial and civil litigation, and also has specialist expertise in insurance law. For more information regarding debt collection, contact Melissa on 03 377 4470 or melissa.borcoski@srblaw.co.nz