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Dealing with Debtors

5 July 2019

Unpaid debts are, unfortunately, part and parcel of running a business.  

Recovering these debts does not need to be difficult or stressful, but it does involve proactive steps in taking stock of your debtors. While regular communication is always the preferred and most cost effective option, businesses are sometimes left with no other choice but to pursue legal remedies for recovery. 

The starting point is often a letter of demand that sets out the basis for the debtor’s liability and demands payment of the debt by a certain date. The letter of demand is a useful first step as that letter may elicit a response, which may include a proposal from the debtor to pay the debt in installments, without the creditor having to take any further steps. 

Where the debtor is a company and you have reason to believe that it is unable to pay its debts, you can serve the company with a statutory demand under section 289 of the Companies Act 1993. However, a statutory demand should not be used when the company is solvent or when the debt is disputed.

The reason for a statutory demand: a company served with a statutory demand must comply within strict time frames by either applying to the High Court to set it aside, or making payment. If the company fails to comply, it is presumed insolvent and can be placed into liquidation on the application of the creditor. Liquidating an insolvent company may not however lead to recovery; therefore, liquidating a company is not always a step in the creditor’s best interests. 

If issuing a statutory demand is not an appropriate option, or where the debtor is an individual, formal proceedings for recovery in the Disputes Tribunal, District Court, or High Court will usually be the next step, depending on the sum involved.  Aside from the sum involved, there are a range of considerations that must be taken into account; such as, the costs of proceedings, the credibility of any dispute, and the debtor’s ability to satisfy any judgment against it. For example, where there is no reasonable dispute, summary judgment (a procedure which allows the court to give judgment without a full trial) may be the preferred option. Sometimes, even when judgment is issued, further enforcement action is required, and there are a number of options open to a judgment creditor depending on the circumstances. 

Ensuring that debts are paid does not need to be a costly exercise: that is, in throwing good money after bad. Should you wish to consider your options in dealing with debtors in further detail, we would be happy to assist you. Please contact Mitch Singh (DDI: (09) 969 1214; m..........@glaister.co.nz) or Paul Kim (DDI: (09) 913 2257; p.......@glaister.co.nz).