Commercial Bad Debts - Prevention and Collection

We are experiencing an increasing number of Commercial bad debts being referred to us that have minimal prospect of recovery. In this article we give examples of debts with a low chance of success & how to avoid these circumstances to ensure your commercial bad debts can be collected effectively.

Companies - No Personal / Directors Guarantees
There are literally hundreds and thousands of small businesses in Australia, with many of these companies being $2 companies that do not own any assets. In fact when you are attempting collection on these debts it is difficult to determine if the company actually owns anything or is of any value. To attempt collection after standard phone calls & letter demands can be expensive with a remote chance of recovery. Privately owned companies do not have to disclose their earnings to anyone other than the ATO, with this information never listed in the public domain.

Companies - Personal / Directors Guarantees in place.
This scenario improves your chances of success in the recovery process. If the company proves to be $2 shelf company, you are given the additional option of pursuing the people that have guaranteed the loan. However what we are experiencing is that at the time of the company being wound-up / disolved, often the person or director who gave the Guarantee then goes Bankrupt, and again you are left with no avenues to pursue your debts.

Companies - Security taken & Personal / Diectors Guarantees in place.
The Big 4 banks are exceptionally good at this, with strict lending policies in place minimising their risks. This situation offers the highest chance of success (with the assumption there is adequate equity in the security & the security will not depreciate in value). With security in place, if the company and guarantors cannot pay your debt, you can fall back to the security. When you commence action to recover your security, our experience has shown that those people with the capacity to pay will pay on this action, and those that genuinely do not have capacity to pay will have their security sold.

Companies - no contracts in place.
This is right back to basics, but its amazing how many companies when selling a good or service do not have a contract in place. This simple step will greatly assist in the Collections Process.

Records Required - Full ASIC extract
When opening an account a full ASIC extract should be obtained on the day account is opened.  We have had experiences of clients opening accounts using a ABR print out.  This doesn’t give directors and the paperwork supplied has been old. So therefore the director who have signed are not current.

Forcing a Company into Liquidation.
Push has come to shove and you feel the only way you will be paid is to force the company into liquidation. This can be done one of two ways;
- Obtain Judgment on your dept and then send a Company Wind Up Notice to the Registered Office that allows the Company 21 days to satisfy the debt, of face liquidation. Costs would likely exceed $3,000. Therefore you want to be sure that you are going to see a payment upon liquidation. Often we see a zero return to creditors with companies in liquidation after the Insolvency Firm & ATO have taken their monies owed.
- Send a company a wind up notice without Judgment. This still allows the Company 21 days to satisfy the debt, however if the the company objects, the notice is set aside (this cannot happen if you have Judgment). Cost of this would be approx $1,000.

An important note on the above, is that neither of these options guarantees payment if the company has no assets. Even if the company does have assets you will be placed on a list of unsecured creditors which is paid after the Liquidators Costs & Tax Office Debts.