npaid invoices are one of the most common problems small businesses face, and one of the most damaging. Every week an invoice goes unpaid, it gets harder to recover. The customer's circumstances can change, other creditors can get in first, and the evidence of what was agreed starts to fade.
The good news is that Victorian law gives businesses a clear path to getting paid. Most debts are recovered without ever going to court. When court is needed, the process is usually simpler and cheaper than people expect. This article walks through each step, from the first reminder to enforcing a judgment.
Step 1: Follow up early
Most late payers are disorganised or short of cash rather than refusing to pay. A polite reminder soon after the due date, followed by a phone call, often resolves the problem.
Keep a record of every reminder, call and reply. If the customer says the invoice is wrong or the work was defective, write down exactly what they say. A complaint raised for the first time after a demand is sent is much less convincing than one raised at the time.
If the customer offers to pay by instalments, get the arrangement in writing. Make it clear that the full balance becomes payable at once if a payment is missed.
Step 2: Send a letter of demand
If reminders don't work, the next step is a formal letter of demand. A letter of demand on a law firm's letterhead often prompts payment, because it shows you are serious and that court is the next step.
A good letter of demand:
sets out what was supplied, when, and the amount owed;
attaches the unpaid invoices and any signed terms of trade;
gives a clear deadline to pay, usually 7 to 14 days;
explains how to pay; and
states that proceedings will be issued without further notice if payment is not made.
The letter should be firm but accurate. Threats you don't intend to carry out, or claims for amounts you can't justify, can weaken your position later. A letter of demand is also often the evidence a court looks at when deciding whether you acted reasonably before suing.
Step 3: Start a court claim
If the letter of demand is ignored, you can sue for the debt. In Victoria, most business debts are claimed in the Magistrates' Court, which hears civil claims of up to $100,000. Larger claims go to the County Court or the Supreme Court.
A claim is started by filing a complaint, which sets out who the parties are, what was supplied and how much is owed. The complaint must then be served on the customer.
Once the complaint is served, the customer has 21 days to file a notice of defence. What happens next depends on how they respond:
No defence. If no defence is filed within 21 days, you can apply for default judgment. This is the most common outcome in debt claims, and it can be obtained without a hearing.
They pay or make an offer. Many customers pay, or propose a payment plan, once they are served. You can agree to settle at any stage.
A defence is filed. The court will usually send the matter to a pre-hearing conference or mediation. Smaller claims may be referred to arbitration, which is a simpler and more informal hearing before a magistrate. If the dispute doesn't settle, it goes to a hearing.
Don't wait too long. In Victoria, a claim for a debt under a contract generally must be started within six years of the date the debt fell due.
Step 4: Enforce the judgment
A judgment is a court order that the customer pay you. Some customers pay as soon as judgment is entered, but others don't. If they don't, the court gives you several ways to enforce it:
Examination of the debtor. The customer can be ordered to attend court and answer questions, on oath, about their income, assets and debts. This tells you which enforcement option is most likely to work.
Warrant to seize property. The Sheriff can seize and sell the customer's property, such as vehicles or equipment, to pay the debt.
Attachment of earnings. If the customer is an employee, part of their wages can be deducted by their employer and paid to you each pay period.
Attachment of debts. Money owed to the customer by someone else, such as funds in a bank account or money owed by their own customers, can be redirected to you.
Charging orders and property. If the customer owns real estate, steps can be taken against their interest in the property.
Bankruptcy or winding up. For larger debts, a judgment can be the basis for bankruptcy proceedings against an individual or winding up proceedings against a company.
The right option depends on what the customer owns and earns. A judgment also remains on the public record, which can affect the customer's ability to get credit. That alone often prompts payment.
Other options for some debts
When the customer is a company: statutory demands
If the customer is a company and the debt is at least $4,000, you may be able to serve a creditor's statutory demand under the Corporations Act 2001 (Cth). The company then has 21 days to pay, reach an agreement with you, or apply to the court to have the demand set aside.
If the company does nothing, it is presumed to be insolvent. You can then apply to the court to have it wound up. Because of this, a statutory demand is a powerful tool, and many companies pay quickly once they receive one.
It must be used carefully. A statutory demand is not appropriate where the company genuinely disputes the debt. In that case, the court may set the demand aside and order you to pay the company's legal costs. If there is a real dispute, a court claim is usually the safer path.
Interest and costs
You can usually claim more than the invoice amount.
Interest. If your terms of trade set an interest rate on overdue accounts, you can claim interest at that rate. If they don't, the court can still award interest. In Victoria this is commonly calculated at the penalty interest rate, which has been 10% a year since 1 February 2017.
Court fees. Filing and service fees are generally added to the judgment if you succeed.
Legal costs. A successful party usually recovers part of its legal costs, calculated under the court's scale. Your terms of trade can also allow you to recover your collection and legal costs in full, if they are drafted properly.
Including interest and costs means a customer who ignores a letter of demand will usually end up paying significantly more than the original invoice. That is often a persuasive point to make in the letter itself.
Preventing bad debts
The easiest debt to recover is one that never becomes overdue. A few simple steps put your business in a much stronger position:
Use written terms of trade. Have customers sign them before you supply. Include payment terms, interest on overdue accounts and the right to recover collection costs.
Take a credit application. Record the customer's full legal name, ABN or ACN and address. Many recovery problems start with not knowing exactly who the customer is.
Ask for a personal guarantee. If the customer is a company, a guarantee from its directors lets you pursue them personally if the company can't pay.
Consider a security interest. If you supply goods, a retention of title clause registered on the Personal Property Securities Register can protect you if the customer becomes insolvent.
Act early. Set a firm internal rule, for example a letter of demand at 60 days overdue. The longer a debt is left, the harder it is to recover.
How O'Haire Legal can help
O'Haire Legal recovers debts for businesses across Victoria. We handle the whole process, from the letter of demand through to court proceedings and enforcement, so you can focus on running your business.
We offer two fee options, so you can choose what suits you:
Staged fixed fees. You know the cost of each step before it starts, with no surprises.
No win, no fee. You pay our fees only if we recover the debt.
If a customer owes you money, call us on (03) 7064 0341 or email home@ohairelegal.com.au.
This article is general information only and is not legal advice. Your situation may be different, so please speak to a lawyer before acting.
