Debt Recovery During COVID-19

The COVID-19 pandemic has been in full swing in Australia for over ten months now. The pandemic and the resulting restrictions have disrupted lives in Australia and around the globe, with no one left untouched.

The suffering is palpable. Family members and friends have been lost, jobs and incomes have diminished or been significantly reduced. Uncertainty has been an all too common theme.

To help, State and Federal Governments have enacted a range of measures to protect debtors, including a moratorium on real estate evictions. Even in the face of unpaid rent or mortgage, landlords have been mandated to negotiate rental relief with tenants, the minimum threshold for initiating bankruptcy and liquidation processes has increased from $5,000 for personal bankruptcy and $2,000 for company insolvency to $20,000, the time limit to responding to the insolvency process has increased from 21 days to 6 months and company directors are, in some circumstances, temporarily relieved from the risk of personal liability for insolvent trading.

As a result, many creditors and parties facing commercial disputes are worried and unsure of how to proceed. Many are wondering if they can still recover debts owed to them or their business, and if it is possible, is it even worth it if faced with potential Court delays and in the face of the above relief measures?

Does the debtor have to pay my client? Should they pursue payment of the debt at this time?

A resounding yes.

Managing debts early on is in your client’s best interest and even more so during these difficult times. Managing the debt recovery process quickly and timely is also important for the debtors financial well-being. If debts are not managed appropriately, it is likely that the debtor financial position will become even more precarious as more time passes. If your client elects to wait too long, they may be risking their own solvency and cash flow issues.

Many debtors have asserted that they are unable to pay their debts due to the COVID-19 pandemic. Some debtors have undoubtedly been adversely affected, however many of them still have the ability to enter into payment arrangements and provide sufficient security to give your client certainty of payment. We have also observed that many of the debtors who claim they are unable to pay debts due to COVID-19 did in fact incur the debts well before the rise of COVID-19 in Australia. Some debtors seem hesitant to part with cash to pay debts.

If the debtor refuses to pay me what can my client do?

As a first step, we recommend sending a formal letter of demand to the debtor. This often elicits a response from the debtor and gives the parties an opportunity to resolve the debt by negotiating payment arrangements backed by security to ensure that they actually get paid.

If the debtor still does not pay, then Court proceedings can be issued. Courts have adapted to the unique pandemic circumstances and can operate electronically through video-conference facilities such as Zoom.

Once Court proceedings are commenced, a debtor has a limited time to either pay the debt, negotiate a resolution or file a defence. If the debtor chooses to ignore the Court proceeding altogether, the creditor can apply for a default judgment (i.e. without holding a formal hearing), ordering the debtor pay the full debt plus the creditor standard legal costs and default interest.

We recently had the opportunity to help a creditor who had been trying to pursue repayment of the loan over the course of two years. With our assistance, the creditor started Court proceedings to elicit a meaningful response from the debtor. Within a month of starting the Court proceeding, we were able to negotiate a settlement ensuring that our client was paid the debt owed plus interest and legal costs.

In another recent case, we were pleased to assist a supplier owed a significant amount of money for services provided.  We were able to negotiate payment of the debt by the end of the year and secured by a mortgage for peace of mind.

Should you and your client require any assistance with respect to debt recovery, please do not hesitate to contact our legal team on 03 8508 7800, sooner rather than later.

This article is intended to be general commentary only and should not be taken as legal advice. Before taking action, ensure you obtain legal advice in relation to your specific circumstances.