Are you having trouble collecting debts owed to your business by your customers? Is poor debt recovery having a negative impact on the cashflow of your business? Poor cashflow is one of the major causes of business collapses in Australia.
At Marino Law, we regularly deal with the consequences of poor cashflow on a business. One thing that we have seen first-hand is that a properly drafted set of terms of conditions that includes the clauses discussed below can significantly assist a business to recover debts owed from customers and improve the cashflow of that business.
To assist a business to recover debts owed to it by its customers, that business should have a properly drafted set of terms and conditions that includes, amongst others, the following clauses:
- a clause enabling the business to recover:
- the costs of recovering the debt from the customer on an indemnity basis; and
- interest on any amount of the unpaid debt;
- a personal guarantee from the directors of any corporate customers; and
- a clause charging the assets, including real property assets of the customer and/or guarantor.
Cost Recovery Clauses
An effective set of terms and conditions should always include a clause pursuant to which the business is able to recover from the customer the costs that the business incurs in recovering the debt and interest on the amount of the unpaid debt. The clause should be drafted such that any legal fees that the business incurs in recovering the debt are able to be recovered from the customer on an indemnity basis. Please note that any clause entitling the business to charge interest on the unpaid debt needs to be carefully drafted so that the clause is not held to be a penalty, therefore rendering the clause unenforceable.
Where the amount of debt owed to a business is a small amount for example, the business may not be willing to take steps to recover that debt where the cost of recovery may be more than the debt itself. Where the terms and conditions of the business include a proper costs recovery clause, the business is able to take steps to recover debts in the knowledge that, subject to being able to recover the debt, the business can also pass on the legal costs incurred in recovering the debt on an indemnity basis.
In our experience, debtors that are aware that, in addition to repaying the principal debt owed, they will be also be required to pay the legal costs incurred in recovering the debt, are far more likely to pay their debts before recovery action is necessary.
At Marino Law we regularly recover debts owed to a business as well as the legal costs incurred in recovering the debt whether through the issuance of statutory demands, the commencement of legal proceedings or simply through a letter of demand.
Charging Clauses
To increase the ability of a business to recover a debt, the terms and conditions that the business trades in accordance with should include a clause pursuant to which the customer charges any property he, she or it owns as security for any amounts it owes to the business. Such a clause would enable a business to lodge a caveat against any real property that is owned by the customer or any guarantor. It would also enable a business to lodge a security interest on the Personal Property Security Register as security for any debts owed to the business by a corporate customer.
In our experience, subject to there being sufficient equity available on a customer’s real property, a business is able to exert a significant amount of leverage against a recalcitrant customer when the business is able to lodge a caveat over that real property. If the customer wishes to sell that property he, she or it will be required to account to the business for what is owed before the caveat can be removed. The business will also be able to recover the costs of lodging the caveat if a costs recovery clause is included in the terms and conditions.
Personal Guarantee
When a business deals with a corporate customer, it is essential that any terms and conditions that the business trades in accordance with, includes a personal guarantee from the directors of that company. This will enable a business to take steps to recover the debt from the director of an impecunious corporate customer.
As indicated in the above paragraph, when coupled with an appropriate charging clause, the personal guarantee will enable a business to lodge a caveat over any real property assets that a director has to secure the debts owed by an impecunious corporate customer to the business.
How Marino Law Can Help
If you already have a set of terms of conditions, why not provide us with a copy of those terms and conditions for our review. We can then amend those terms and conditions if necessary to incorporate the clauses detailed in the above paragraphs. If you don’t have a set of terms and conditions, or if the terms and conditions you do have are out of date or not properly drafted such that they incorporate the clauses dealt with above, you should consider engaging us to amend your existing terms and conditions or provide you with new terms and conditions.
Once your terms and conditions have been reviewed, amended or redrafted, to enable you to concentrate on growing your business, we recommend that serious consideration be given to engaging us to take the requisite steps to recover the debts owed to your business from its customers with that expense to be ultimately borne by the customer.
Further Information
Marino Law has extensive experience acting for businesses in the recovery of debts owed by customers. Our highly experienced lawyers regularly:
- review and update the terms and conditions of a business, or draft new terms and conditions for a business, to ensure they enable effective debt recovery through the incorporation of the clauses detailed in the above paragraphs; and
- recover debts owed to a business through, the issuance of letters of demand and statutory demands, the commencement of Court proceedings and negotiation with the customer.
Should you require assistance in any of the above areas, please contact one of our highly experienced lawyers.
