At LCollect we believe that knowledge is power. Every month our debt collection blog gives you practical tips, stories and news from around Australia and the world.
Ipso facto clauses allow one party to a Contract or Agreement to terminate or vary a Contract typically upon an insolvency event, such as the appointment of a company administrator. This is regardless of continued and historical performance under the contract - ie payments are still being made with no amounts outstanding for payment.
The operation of these clauses diminishes the value of a business when an insolvency event occurs and may reduce the scope for a successful restructure or prevent the sale of the business as a going concern, with consequential impact on the returns to Creditors in any subsequent liquidation. This was particularly the case with the collapse of One.Tel in May 2001 where once ispo facto clauses were invoked, services were unable to be provided.
The lack of protection from the operation of ipso facto clauses has been a key criticism of the voluntary administration regime contained in Part 5.3A of the Corporations Act 2001.
In the 2015 report on Business Set-Up, Transfer and Closure, the Productivity Commission recommended that the Corporations Act 2001 be amended such that ipso facto clauses that have the purpose of allowing termination of Contracts solely due to an insolvency event are unenforceable if the company is in voluntary administration or in the process of forming a scheme of arrangement with Creditors.
For reasons of practicality the Government considers that this approach should be extended to include other types of ipso facto clauses (such as clauses that vary terms of a Contract) which may be disproportionately detrimental to companies undertaking a restructure.
If the recommendations made are implemented later this year there will be a requirement for adequate safeguards to ensure that they are not abused and to protect Creditors however the adoption of the recommendations would provide a more balanced approach for a company that is undergoing financial distress and lead to a better result for all parties.
Recent data from a UK based finance company, MarketInvoice, shows that Australian businesses, especially larger corporations and Government departments, are the worst in the world when it comes to paying invoices in a timely manner.
The report, which you can read here, shows that, on average in Australia, it takes 26.4 days for an invoice to be paid. In direct comparison the Japanese are renowned for paying on time and, on average, pay an invoice 6.5 days prior to the due date.
The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, said in an interview with ABC 702 Breakfast, "[T]hose are the companies that they’ve got a capacity to pay quicker. And yes, they’re doing it because they can, they’re using small business people fundamentally as banks I suppose – very cheap banks – and we just think that’s not acceptable; it's impacting upon on our economy, so we’ve launched today an inquiry into this."
By sector, banks were the the best payers, typically settling their accounts 1 day past the due date with supermarkets and eCommerce merchants paying 7 days after the due date. High-street retailers typically settled their accounts 2 weeks past the due date.
The inquiry, The Payment Times and Practices Inquiry, launched by Australian Small Business and Family Enterprise Ombudsman, aims to possibly introduce regulations that will punish larger organisations that are late paying small business.
You can provide feedback to the Australian Small Business and Family Enterprise Ombudsman via their website.
We will continue to monitor the progress of the inquiry and provide updates as they become available.
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A Sydney based SEO ("Search Engine Optimisation") company allegedly contacting 3rd parties in relation to an outstanding debt is currently being investigated by NSW Fair Trading over potential breaches of Australian Consumer Law.
The company, Search Results Specialists, appears to undertake their own debt collection activities and after having invoices go unpaid by La Mona Beauty it is alleged that they contacted 3rd parties, including the owners daughter's boyfriends employer, the owners son's boss as well as the Local Council and suppliers to the debtor.
Search Result Specialists claimed that La Mona Beauty owed $1,400 for SEO work performed however the owner, Nidhal Robb, denied utilising their services and asked for evidence which was not forthcoming.
It is being reported that the matter has now been settled by the parties, NSW Fair Trading have indicated that since 2014, 64 complaints have been received about Search Results Specialists including 12 in this year alone.
While this is certainly not an isolated incident for Search Results Specialists it should serve as a reminder to anyone undertaking the collection of debts that you must comply with not only Australian Consumer Law but also the ACCC / ASIC Debt Collection Guidelines.
SmartCompany is reporting that small business owners are using strange and unusual techniques to recover their debts including wiping half of a debt for a cup of coffee.
Other strange and unusual techniques involved*:
A Canadian builder camping outside of a client's office until payment of an invoice in excess of 700 days past due was paid
Sitting on the bonnet of the CEO's BMW with a hammer and asking which headlight he wanted broken first
Attending a customers house on Christmas day as the customer had refused to pay
Whether or not these other techniques were successful or not is not known.
With SmartCompany reporting that 1 in 10 Australian businesses waiting in excess of a year to receive payment, Xero are confirming this and further indicated that two thirds of Australian businesses have waited more than 2 months for invoices to be cleared.
Meanwhile PayPal Australia, in collaboration with Xero have commenced rolling out PayPal Express Checkout. A system designed to allow customers to click through outstanding invoices and pay with a direct link to the appropriate payment options in an attempt to dramatically reduce the time taken for invoices to be paid by removing barriers and potentially increasing the cash-flow of Australian businesses.
*LCollect does not condone these activities and recommend that you utilise a debt collection professional who complies will all relevant State and Federal Legislation
With the conclusion of the financial year upon us, it is a good opportunity to reflect on the past 12 months and give some insights from our perspective into the industry, and reflect on some of the milestones and changes to the industry:
Last month we indicated that the debt collection industry was being reviewed by the ACCC. You can read our blog post here.
Some of the research reports key findings include:
The report has interesting insights to the credit repair industry, with all stakeholders (industry, regulators, ombudsmen, retailers and consumer advocates) noting the negative impact credit repair activities have on consumers, the EDR process and the credit reporting system. An extract from the COSL / CIO 2014 annual report was taken which provided an example of a consumer being charged an upfront fee of $900 and then $1000 per default listing removed where the credit default was for $500.
We would encourage everyone involved in the industry to go over this report. It may provide you with insights in other areas of interest to you.
We recently had a commercial client provide services to a trust in the medical industry that had a standard trading name that was attributable to a discretionary trading trust. With our client failing to perform any searches at the initial credit acceptance stage, they were unaware of this when they instructed us to collect the debt for them.
Our clients in the accounting, legal and medical segments are more likely to have a good working knowledge of discretionary trading trusts. However even some of these clients fail to cover themselves adequately when setting up their trading terms, performing the appropriate searches and seeking guarantees.
When it comes to credit acceptance and Trusts it is important to correctly identify you are trading with a trust, and to setup your credit acceptance appropriately.
It is important to note that you cannot sue a trust, and a trust cannot sue you.
When dealing with a trust, you should be invoicing and taking action against a trustee who is liable for the trusts liabilities.
This then raises the issue of who the trustee actually is. It is common to have a corporate trustee for trusts (Pty Ltd), with the corporate trustee typically an entity that has no assets and is in place to limit the liability of the people involved. To mitigate this risk when providing credit, you should therefore seek personal guarantees from the people you are dealing with.
It is also prudent to determine what income and assets these guarantors actually have. This will govern the collection actions available to you when seeking to enforce your debt. This step can be applied to dealings with all companies when you supply them credit, and is a simple, yet often not followed step.
Please note that this article is not intended to be legal advice and does not constitute legal advice.
Reviewing the AFSA Bankruptcy statistics for individual bankruptcy occurrences can be an interesting exercise when assessing the risk of any one particular industry that your business might be associated with.
When analysing statistics one must be careful to always keep statistics in context. These statistics were sourced from AFSA.
Our first observation is that Bankruptcy occurs on only 0.17% of the employed workforce across all sectors. The lowest sector is the professional sector with only 0.07% and the highest sector being Machinery Operators and drivers with only 0.24%.
Education Professionals, a subset of the Professional group below, experiences only 0.04%, whilst bankruptcy for road and rail drivers is 0.34% of the employed workforce.
Our take from this is that it is interesting to note from a debt collection perspective, as an overall % the instances of bankruptcy are very low compared to the total workforce. And whilst a road / rail driver is over 8 times more likely to be made bankruptcy than an educational professional, the risk weighting differential is only small. This differential could have a large monetary impact for a large institution (such as a big four bank), but would be a lot less significant for a smaller provider of credit. Though a smaller provider of credit to an industry that has a higher risk
|ANZSCO Occupational Group||Total
|Total debt agreement debtors||
|Technicians and Trades Workers||3,121||1,410||29|
|Community and Personal Service Workers||1,751||1,329||13|
|Clerical and Administrative Workers||2,231||1,506||23|
|Machinery Operators and Drivers||1,755||1,158||13|
|ANZSCO Occupational Group||Number of people
in the May
quarter 2014 ('000)
|Technicians and Trades Workers||1,678.4||0.19%||0.08%|
|Community and Personal Service Workers||1,169.1||0.15%||0.11%|
|Clerical and Administrative Workers||1,673.6||0.13%||0.09%|
|Machinery Operators and Drivers||746.7||0.24%||0.16%|
We have had a number of recent cases where credit repair companies have contacted us to advise that unless it is agreed to set aside a Judgment that they will approach the court to have the Judgment set aside.
In these cases one of the Judgments had been paid in full on the basis of an Instalment Order being filed with the Court. In another example the debtor had settled the debt and another a Notice of Confession of Whole of Claim had been filed.
In short there was no valid reason to remove the credit listing with the debtors only making payments towards the debts as a result of the Judgment being enforced.
The objective of the credit repair company is to remove all listings on their customers credit file. This process is commenced by the credit repair company against the credit provider in instances where the credit listing is not a Judgment by threatening to go to an Ombudsmen (either FOS or COSL) to try and leverage the Credit Provider to have the listing removed. If the Credit Provider does not oblige the credit credit repair company takes the matter to the Ombudsmen. You can read more about what the Ombudsmen is trying to do about this here.
Where the debt is a Judgment debt the only way for them to achieve this to have Judgment set aside, either by consent or having the matter listed for hearing. Alternatively they may wait out the appropriate amount of time before the Judgment drops off on the credit file.
On each of our lawyers appearances in Court no one has appeared for the other side and the Court has dismissed the proceedings stating that there is no proper basis to continue and awarded a Cost Order against the debtor. The credit repair companies are only succeeding in adding to their clients debts.
We speculate that as these people are worried about their credit files, they are in a financial position where they want to borrow money and have some capacity to repay their debts, but cannot borrow until their credit files are cleared up. With a Court Order for costs, we will now be collecting debts that were previously paid.......