Typo Error Results in Creditors Statutory Demand Being Struck Out

In a recent matter before the Supreme Court in Victoria a Creditors Statutory Demand has been set aside by the Court on the basis that the demand was incorrectly addressed.

By way of background the Plaintiff, Mills Oakley, commenced proceedings against the Defendant, Assets HQ Australia, in the District Court in NSW and obtained a Judgment in October 2018. A Statutory Demand was issued in respect of the debt for $158,905.67 which remained unpaid. Pursuant to s459C(2)(a) of the Corporations Act a company is presumed to be insolvent if it has failed to satisfy a Statutory Demand within 21 days of service being effected.

In the proceedings Mills Oakley v Asset HQ Australia Pty Ltd [2019] VSC 98, the Plaintiff relied on non-payment as a presumption of insolvency and commenced wind-up proceedings in the Supreme Court however Solicitors for Asset HQ Australia argued that there was insufficient evidence of the Statutory Demand being served. The basis of this argument focused around:

• the registered companies address being noted as "Pacific Way" rather than "Pacific Highway" on the Demand;
• the company claiming to have never received the Demand; and
• the Plaintiff being able to prove that service was affected by Australia Post.

Australian Government To Crack Down On Late Paying Large Corporations & Government Departments {Update}

You may recall in our November 2016 edition of Debt Collection news that there were moves within the Government to crack down on late paying large corporations and Government departments. 

It appears that this issue has been raised again with the Small Business Ombudsman, Kate Carnell, telling Fairfax Media that she was again conducting a review of payment times and the impact that this has on cash-flow on small businesses in Australia.

This again follows the Ombudsmans review into payment times last year, which we covered in Australian SMEs Owed More Than $10,000, which identified Australian payment times as the worst in the world with invoices paid, on average, 26.4 days past due. In a statement to the media Ms Carnell said, "It is big businesses using small business as a cheap bank," Ms Carnell said. "It really does slow down the economy. Poor cash flow is the primary reason for insolvency in Australia.”

The recent move by the Ombudsman appears to have been prompted by Small Business Minister, Michaelia Cash, who requested in writing advice from the Ombudsman for advice as to the impact payment practices have on small business. Ms Cash said, "I am still getting reports of payment terms of 60, 90 or 120 days or alternatively loans for extended payment terms. I find that very troubling particularly when cash flow is king for small businesses. It continues to be an issue and we will tackle it."

Following last years inquiry the Business Council of Australia launched a voluntary code to ensure that small businesses were paid within 30 days of an invoice being issued. With, however only 47 of 139 members, subscribing to the Code there is now some consideration being given to passing legislation in which to compel payment to ensure small businesses continue to survive.

A short survey is available online for small businesses to complete about the payment times they encounter. 

Ipso Facto Clauses

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.

Australian Government To Crack Down On Late Paying Large Corporations & Government Departments

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.

Source: ABC 702 Breakfast - Interview With Robbie Buck

Please Provide Your Feedback Into an LCollect Website Redesign

As part of our continuing commitment to improvement and innovation we are currently in the process of redesigning the LCollect website. Our current site will remain live during this period with no service interruptions.

As the day-to-day users of our website we are seeking your feedback about what we currently do well on our website, what we need to improve and what you would like to see when you visit our site.

You can complete our feedback survey here.

Alternatively please contact us and let us know your thoughts.

Fair Trading Investigate SEO Company

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. 

Source: Daily Telegraph - Public Defender: Search Results Specialists Will Hound People You Know If You Owe Them Money

Unusual Debt Collection Techniques

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.

Source: SmartCompany - Quirky Ways Australian Small Business Collecting Late Payments

*LCollect does not condone these activities and recommend that you utilise a debt collection professional who complies will all relevant State and Federal Legislation

Debt collection reflection for FY 2015

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:

• The CIO's (previously COSL) refusal to deal with certain credit repair companies. This was a welcome change of approach. However we note that a majority of our consumer credit clients / AFSL licensed clients are members of FOS. To our knowledge this approach has not been replicated with FOS.  It will be interesting to see how legislators and regulators deal with this space moving forward. The ACCC has also identified this in its research report into the industry.
• Feedback from our clients is that competition to lend money is fierce at all levels. Those successfully marketing to their target market / niche are able to grow their lending portfolios.
• Generally arrears provisions are down. With interest rates at prolonged historical lows, clients are reporting exceptionally good arrears results. A large proportion of accounts that do get written off are bankrupts where no previous indication of financial distress was know with no opportunity to identify an account in hardship to assist the borrower. This is also reflected in historically low volumes of actions through the various courts. Interestingly in the courts, they are also experiencing a reduction in insurance claims.
• In December, a number of our clients for the first time initiated policies of halting all collection action (excluding phone calls, contact and reminder letters) in the lead up to Christmas, with instruction not to recommence until varying times in January. The principle reason cited for this was brand management and brand protection. (The natural flow on from this can be delays of 6-8 weeks in a matter such as obtaining vacant possession of a property which may raise other issues).
• In our commercial collection space, for new clients our biggest issue continues to be clients not correctly setting up their lines of credit, not performing basic company searches, director searches to properly inform themselves as to who they are dealing with. When these searches are performed and guarantees are taken, an asset search of the director is not undertaken to actually understand the benefit of the Directors Guarantee. What appears at first glance to be a good collection prospect unravels quickly once the proper searches are undertaken. Similar to consumer credit, some clients are experiencing no warning of clients financial distress until the appointment of a liquidator.
• The ACCC research paper into the debt collection industry is a must read for all parties in credit control and debt collection. We raised this last month, you can download a copy on this link.
• In NSW,  the Government released its report into debt collection, and QLD commenced a negative license regime for phone collectors in QLD.
• The ACCC and ASIC published a new guide to Debt Collection in July 2014. This provided new guidance in handling emerging technologies.
• The Privacy Principles were updated.

ACCC Report on the Debt Collection 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:

• Technology and scale have improved compliance.
• Issues with debt collection vary by sectors with a clear distinction between credit regulated and non-credit regulated.
• The energy sector faces a unique challenge in the face of rising energy costs.
• Debt collection practices that add additional charges may result in detriment for consumers in financial distress. These charges may be misleading if not supported by contracts.
• Increased oversight has led to an improvement in debt collection behaviour.
• Credit repair business are often increasing costs for debtors with problems.

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.

You can read the full ACCC report here or download a copy by clicking this link.

Invoicing and Trusts in Debt Collection

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.