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Debt Collection – What we are hearing from our clients

Debt Collection – What we are hearing from our clients

Regardless of which industry they operate in, clients are expressing to us a sense of dislocation from their usual business networks. Social isolation has meant that feedback from customers, practical guidance from industry associations and even gossip from colleagues has been harder to come by. Under these pressures it is easy to feel as though your business challenges are unique to you.

If COVID-19 has led you to put debt collection down your business priority list you are not alone. Most of the business owners we have spoken to are:

  1. Not commencing any new legal action against debtors, and/or
  2. Ceasing debt collection activities all together, regardless of whether the debtor has provided an explanation for the delay in paying.

The current pandemic has, and indeed should, cause a rethink of debt collection practices. However, this is not the same as abandoning debt collection all together. It is possible to continue a disciplined and rigorous approach to debt collection whilst taking into account the difficulties that your customers are facing in light of the current restrictions. You might for example consider implementing a freeze on accumulating interest on outstanding debtors until economic conditions improve. You may also consider putting certain customers on a “cash on delivery” basis for supply in respect of orders going forward, on the basis that you agree not to pursue amounts currently in debt.
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Money for Nothing? Or, Something Instead of Nothing.

By Ellen Ferris, a Solicitor in Matthews Folbigg’s Insolvency, Restructuring and Debt Recovery Group.

Before commencing potentially costly court proceedings, there are a number of debt recovery options which should be canvassed by a wise creditor. One such option is that of a payment plan, or payment arrangement.

The benefits of a payment plan include;

  1. Regular payments from the debtor assisting with cashflow;
  2. Debtors are more likely to be able to repay a debt when it is broken down into smaller repayments;
  3. Potentially keeping relationships with valued customers;
  4. Opens up a channel of communication with the debtor;
  5. Avoiding disputes over the amounts owing.

A payment plan can take the form of an informal arrangement, or even just simply letting the debtor pay the debt off in smaller amounts without objecting or suing for the balance. On the other hand the terms may be set out in a formal deed.  There are advantages and disadvantages to both approaches, and much will depend upon which of the benefits set out above are most attractive to the creditor.
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BANKRUPT MAN CONVICTED OF CRIMINAL OFFENCES

By Darrin Mitchell, Senior Associate at Matthews Folbigg in the Insolvency, Restructuring and Debt Recovery Group

The idea of bankruptcy began in England in the early sixteenth century when merchants and traders conducted business on credit.  A bankrupt person could face imprisonment until released by the Lord Chancellor after disclosure of all debts and various tasks had been completed.  In the late seventeenth century Lord Kenyon reasserted the old sentiment that “Bankruptcy is considered a crime and a bankrupt in the old laws is called an offender.”

The term “bankruptcy” comes from “banka rupt” or “broken bench”.  The system of bankruptcy evolved as more and more businesses used credit as a form of trade following the onset of the industrial revolution to what we have today where any person unable to pay their debts can petition to be declared bankrupt.

Bankruptcy today is sometimes considered to be an easy option to paying debts.  However, attempting to buck the system can still result in criminal charges being brought against you under the Bankruptcy Act 1966 (Cth)(“the Act”) and if convicted, a gaol term maybe imposed.
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Criminal and civil penalties for creditor-defeating dispositions: Illegal Phoenixing Amendments 2020 #6

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

As discussed in previous blogs in this series, both directors and external advisers have a duty to prevent creditor-defeating dispositions. Not only are they potentially liable for compensation, additionally they are liable for fines as well as it being a criminal offence. An offence could result in a maximum prison sentence of up to 10 years. The intention element is satisfied if a person has knowledge, intention or recklessness of the disposition being a creditor-defeating disposition.

The potential fines for a breach of the section can be severe. For individuals, the pecuniary penalty applicable is the greater of either 5,000 penalty units ($1.05m) or three times any benefit derived or detriment avoided because of the contravention.

For corporate bodies, the pecuniary penalty applicable is the greater of either:

  1. 50,000 penalty units ($10.5m);
  2. Three times any benefit derived or detriment avoided because of the contravention; or

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Defences to Creditor-Defeating Dispositions: Illegal Phoenixing Amendments 2020 #5

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

In our last two blogs we discussed the liability on directors and third party facilitators for failing to prevent creditor-defeating dispositions. We now discuss the defences that may be available to directors and third party facilitators who would otherwise be liable.

Extension of market value

As mentioned in our previous blogs, the definition of ‘market value’ is extended to include the concept of the ‘best price reasonably obtainable’. The objective is to take into account circumstances where a company has an urgent need of cash-flow and may not be in a position to sell its assets at the market price, such as that deemed by a qualified valuer. If a company considers it is forced to sell off an asset which may be at a price less than real market value, due to time constraints in needing to realise cash, companies and advisers should consider making careful records evidencing the steps taken to attempt to realise it for as much of its market value as possible. This should include the circumstances the company was in requiring it to sell the asset potentially at under value.
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Virgin Australia – What Now?

By Anica Cunanan, Law Clerk and Darrin Mitchell, Senior Associate, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

In our first article on the voluntary administration of Virgin Australia we looked at the appointment of the voluntary administrators and the impact the appointment would initially have on the company.

We also looked at the role of receivers and external administrators including liquidators, and voluntary administrators, defining the roles that the different types of administrators can play in the restructuring of a company in distress. Our first article can be found here.

Virgin Australia is at present under voluntary administration. There are three possible outcomes when a company enters voluntary administration. Either the company is returned to the directors (which is rare); enters into a deed of company arrangement (‘DOCA’), or it is placed into liquidation. The decision is ultimately up to the creditors at the second meeting under the administration.

When a company is in administration, the administrator’s role is to investigate the company’s financial affairs and through this information, deal with any proposal for a DOCA on behalf of creditors of the company. The administrator will recommend the best plan for the creditors of the company, by comparing the outcome under any proposed DOCA, with that which is likely in a winding up. If the company is continuing to trade (like Virgin Australia) then the administrator takes on the responsibility for any decisions which need to be made, together with any liabilities incurred during this time.
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COVID-19 –What Debt will Scuttle Passage to the New Safe Harbours?

By Ellen Ferris, a Solicitor in Matthews Folbigg’s Insolvency, Restructuring and Debt Recovery Group.

Amendments in March of this year have brought about changes to the Corporations Act 2001 which allow for an additional temporary safe harbour to protect directors from insolvent trading, –  see our blog here.

However, companies do not automatically qualify for the protection. To qualify, the debt must be incurred as follows:

  • In the ordinary course of the company’s business;
  • During the six month period starting from the date the new law commenced (being 24 March 2020); and
  • Before any appointment of an administrator or liquidator.

The evidentiary burden of proof is on the person seeking to rely on the safe harbour relief, which means that it will be up to directors to make sure they obtain and keep evidence that their debt meets the criteria.

According to the explanatory memorandum in respect of the amending legislation, a director will be taken to have incurred a debt in the ordinary course of business if the debt “is necessary to facilitate the continuation of the business during the six month period that begins on commencement of the subparagraph”. This is narrower than the criteria for the existing safe harbour provisions, which focus on debts incurred in the pursuit of a course of action likely to lead to a better outcome for the company than liquidation. The Explanatory Memorandum gives the following examples for debts incurred in the ordinary course of business:
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COVID-19: Will my hearing go ahead? – Part 3

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

This is part 3 of our series on what will constitute valid grounds for an adjournment of a pending hearing, due to COVID-19 and the global coronavirus pandemic.

In Talent v Official Trustee in Bankruptcy & Anor (No 5) [2020] ACTSC 64 the Plaintiff sought an adjournment of the trial hearing, arguing that he was an ‘at risk’ person because he suffered from leukaemia. Doctors had recommended that he remain isolated.

Submissions were made about the Plaintiff’s legal team being at risk, as well as the Defendant’s senior counsel withdrawing because she was at risk and could not fly down for the hearing. However, those matters were expressly not considered.

The court did consider that a lot of the hearing could be conducted from a remote location. However, on balance the Court granted the adjournment application, based on the Plaintiff’s right to observe the hearing and the need to provide prompt instructions. The Court drew a distinction between final hearings and other court procedures:
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