COLLECT YOUR DEBTS!
You may be in public practice as an accountant and wondering what steps you can take to make your recalcitrant clients pay. Or you may work in industry and have responsibility for collecting the debts of your company. What steps can you take? Should you use the Courts' system to try to collect the debts?
It hardly needs to be pointed out to an accountant that a good system of credit control is essential for reducing the incidence of bad debts. The following are the essential elements of such a system. Establish a minimum invoice level for credit e.g. $100. Establish a maximum credit limit for each customer. Obtain adequate details of the customer before establishing the credit limit. Obtain references if this is thought advisable. Contact a credit reference association for a credit check. If your customer is a company, have the directors guarantee the debt.
If you are a tax agent and you want to deduct the fee from the refund, then get the tax-payer to authorise you in writing to do so. There are technical reasons for this. It has been decided by the High Court of Australia that government debts cannot be assigned. Normally, when a debt is assigned, you can notify the creditor of the assignment and the creditor will then be legally bound to pay you and not the debtor. As stated, this does not apply to government debts. The consequence of this is that the Tax Office is bound to take instructions from the tax-payer at any time as to how the refund cheque is to be dealt with. Consequently, with tax-payer refund cheques, for your own protection, you should always obtain his authority in writing before banking the cheque in your trust account. You are never entitled to bank the tax-refund cheque without the tax-payer's consent.
If your company sells goods, consider having a written credit agreement with a reservation of title clause. In some countries, it is common practice to allow a 2.5% discount if the invoice is paid within 30 days but this is not usual in Australia. Make sure that you raise an invoice and send it to the customer promptly. Make sure that you send a monthly Statement to the customer until the debt is paid. Prepare a list of your debtors at the end of each month. This list should highlight the debtors with invoices unpaid for over three months. These are the problem debts and you must concentrate on collecting these. The most effective method of collecting problem debts is by constant pressure. Precipitate legal action should be avoided. Phone problem debtors and request payment. If the account is large enough, you might offer to personally pick up the cheque. If phoning does not produce results, call personally at the customer's premises. If the debt begins to look doubtful, cut off the supply of goods or services to the customer. The next step is to place the debt in the hands of a debt collector. If possible, make an arrangement with your debt collector that no fee is payable if the debt is not collected.
If the debt collector is unable to collect the debt, you must decide whether it is worth using the Courts' system. It is hardly economic to use the Courts' system to collect debts under $100. These should be written off. Assuming you decide to use the Courts system, should you do it yourself or should you obtain legal assistance? If the debtor has a stable business in the community and the obvious means to pay, you would be better off using the services of a lawyer. All of his legal costs will eventually be borne by the debtor when he pays. However, if you have doubts about ultimately being able to collect the debt, you may decide to attempt to collect the debt yourself through the Courts' system. How should you go about doing this? The States and Territories of Australia have differing laws regarding debt. Also, their courts are called by different names. However, by and large, the method of collecting a debt is much the same in all areas.
First, go along to the office of your local court. It is often called the Small Claims court. Ask for three summons forms. Sometimes, you may have the choice of bringing an action in two different courts e.g. the Small Claims Court and another court. Often, one court can award costs and the other cannot. Typically, the Small Claims Court cannot award costs. If you expect the action to be defended, it might be in your interest to bring the action in the Small Claims Court. This consideration often applies when suing for professional fees and the defendant is likely to allege all manner of things in order to avoid having to pay the fee. You begin to fill up the summons form by entering your name and address and the name and address of the debtor. If you do not know the current address of the debtor, you should first of all make your own enquiries. Then look in the Phone Book. Next, go along to the office of the Electoral Commission in your area and search in the Electoral Roll. If this proves fruitless, go along to your local Motor Registry and have a search carried out there. If the debtor trades under a Business Name, carry out a search at the Business Names registry. Carry out a search at the Bills of Sale registry. If the debtor is a company, carry out a search at the Australian Securities Commission local office. Find out the registered office of the company. The summons must be served on the registered office of the company. If the debtor has gone interstate and you know his current address, you can have the summons served interstate.
The next part of the summons is your statement of claim. For instance, you might say "I carried out professional services for Mr Smith between 1st July 1991 and 31st December 1991 to the value of $500. I have not been paid for these services." You must next take the completed summons with two copies back to the office of the court. The court will usually arrange to serve the summons on the debtor. Alternatively, you can employ a private bailiff to serve the summons. He will generally charge more than the court bailiff but he will often serve the summons sooner. You may have to pay a court fee to the court office. This is generally around $30. You will have to pay an additional court fee of $30 for the bailiff to serve the summons. Once the bailiff has served the summons, the debtor is allowed a period, usually 28 days, to tell the office of the court whether he intends to defend the claim. If he does, you are notified by the office of the court. Initially, an informal conference is arranged between you and debtor before the Registrar of the Court. If this does not succeed in settling the matter, a trial date is fixed. In the great majority of cases, the debtor does not defend the claim. If the debtor does not defend the claim, you can apply to the office of the court to have judgment entered for you.
Once you have done this, do not sit back in triumph waiting for the money to roll in. You must now collect the money from the debtor. There are basically three ways available to you to collect the money. These are 1) Seize the debtor's goods, 2) Have the debtor brought before the court to examine him and 3) have the debt deducted from the debtor's wages.
If you know that the debtor has assets, then your best bet is to go for no. 1. You must again go along to the office of the court and fill out another summons with two copies. This instructs the bailiff to seize the debtor's goods, sell them and pay you your money. You can usually employ either the court bailiff or a private bailiff. You must tell the bailiff where he can find goods belonging to the debtor to seize. Not all goods in the possession of the debtor can be seized. Rented or leased goods cannot be seized. Goods belonging to the spouse of the debtor cannot be seized. Clothing, household goods and tools cannot be seized. If the assets are subject to a chattels mortgage, the finance company must first be paid out from the proceeds of sale. If the debtor is a company, only the company assets can be seized. The assets belonging to the directors cannot be seized. However, if the debtor is a private individual or a partnership, both business and private assets can be seized. The bailiff will hold the goods for a number of days, generally five, and then sell them. You will be paid the amount of your debt, together with court fees paid by you, out of the sale proceeds. The great majority of debtors pay up when the bailiff arrives on the doorstep. It is rare for the bailiff to have to actually sell the goods. How can you find out what assets belong to the debtor? First of all, consult your records and make enquiries. Then do some searches of public records. If the debtor is a company, search the company file at the Australian Securities Commission local office. Carry out a search at the local Motor Registry office. Carry out a search at the Bills of Sales register. Carry out a search at the Lands Titles office. Land and real estate can also be seized.
Your second option in collecting the debt is to have the debtor brought to court before a magistrate. The magistrate will ask him questions as to his current wages and what assets he has at present. You may also be allowed to question the debtor. Depending on the debtor's income and family responsibilities, the magistrate will generally make an order that the debtor pay the debt by instalments. If the debtor subsequently refuses to pay any of the instalments, you can again apply to the court office to have the debtor brought before the magistrate.
Your third option is to obtain a garnishee order. You get an order from a magistrate ordering a third person to pay money to you. This could be an employer, a bank where an account is held or a person who owes money to the debtor. Suppose you know that your debtor has a steady job and earns good money. You go along to the office of the court and fill out a form requesting to see a magistrate in private. You tell the magistrate your story and he gives you an order addressed to the employer. This order instructs the employer to deduct the debt from the weekly wages of the debtor and pay it to you. Often, it will be by instalments. You give this order to the employer and, hopefully, you will be paid. However, some people who are owed money dislike using this procedure. It is quite common for employers to fire an employee who has an order against him. You may not wish this to happen however much ill- feeling you may have towards the debtor. Alternatively, the employee may leave once the order is served and you will not get paid. A garnishee order can also be obtained against a bank account. Suppose you know that the debtor has a cheque or savings account at a local bank. You can obtain a garnishee order against the bank. You serve it on the local bank manager. However, when you come to serve the order on the manager, you may get a nasty surprise. There may be no funds in the account or the account may have been closed.
A fourth option open to you is to make the debtor bankrupt. You will have to do this through the Federal Court.
If the debtor is a company, you have some further options. You can serve a notice on the company threatening to have the company wound up if the debt is not paid within three weeks. This is a very powerful method of persuasion and most companies will pay rather than risk having the company wound up. If they do not pay, you can apply to the Supreme Court to have a liquidator appointed and the company wound up. Legal assistance is advisable here.
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