COVID-19: Managing financial exposure and debtors in distress in difficult times

Australia is facing a health crisis and an economic crisis due to COVID-19. Individuals and businesses will struggle to pay their debts causing ripple effects on other businesses, culminating in a wave of significant financial distress for the wider economy.

Although there will be many genuinely under financial distress as a result of COVID-19, there will also be those who will seek to use COVID-19 as an excuse to defer payment of their debts, or to avoid payment altogether. Businesses managing their own cash flows will need to make an assessment as to which of their debtors are genuinely in need of indulgences and which may be taking advantage of this crisis.

In addition, the Australian Government has introduced significant changes to the bankruptcy and corporate insolvency regimes, effective from 25 March 2020 for a period of six months. While these changes provide substantial relief for debtors in the current climate, they are also likely to cause delays in creditors seeking to recover debts owing to them.

In this climate it’s critical for businesses to review their terms of trade and how they manage debtors. First things first

Supplier businesses considering helping out their customers should first ensure that they have appropriate up to date trading terms and conditions of supply which they can rely on to enforce payment by their customers if needs be. Wherever possible, these terms should allow for the conduct of credit checks upon customers and provide for the provision of personal guarantees by the customer’s directors or owner. Where the Supplier supplies goods, those terms should also provide for the supplier to have a security interest over the goods supplied to the customer for any supplies made otherwise than on a COD basis. This will allow the supplier to recover the goods in the event of the customer’s insolvency, provided that the security interests are registered on the Personal Properties Security Register.

Suppliers with these arrangements in place are in a much stronger position to enter into revised terms with their customers who are genuinely facing financial distress, and ultimately to recover debts owing in due course.

How to recover outstanding monies

Revised Terms

Assuming that a supplier already has agreed terms in place with a customer genuinely facing financial difficulty, it may be prepared to agree new terms with that customer. This is particularly the case if that customer is strategically important to the supplier’s business, or the customer is a longstanding and loyal customer of the supplier.

In these circumstances the supplier and the customer may negotiate and agree revised payment terms which benefit the customer, and potentially allow the customer to continue to carry on business. It is important that that these revised terms:

• do not vary critical terms of the existing agreement with the customer (such as the provision of personal guarantees or security interests) and do not constitute a waiver of any remedies available to the supplier under the existing agreement;
• are recorded in writing and signed by the customer (and the customer’s guarantors where appropriate) once agreed; and
• are monitored by the supplier to ensure the customer complies with the revised terms.

Commencing proceedings

Prior to commencing proceedings to enforce agreed terms with a debtor customer, a creditor supplier must send a letter of demand to the debtor that allows the debtor 21 days to pay the amount outstanding or to pay an agreed amount.

If a suitable arrangement cannot be reached, the creditor may commence an action in the appropriate Court to recover the outstanding debt. This is done by filing a Claim seeking an Order that the debtor pays the outstanding monies.

The debtor will have 21 days to pay the debt for Claims filed in the Magistrates Court or 28 days for Claims filed in the District or Supreme Court. If no defence is filed, the creditor may seek judgment against the debtor.

Enforcement action

If judgement is obtained, the creditor may, among other things, request that the Court issue an investigation summons, which requires the debtor to provide evidence as to the debtor’s financial circumstances. If the Court is satisfied the debtor has the capacity to make contributions towards reducing the debt, the Court will make an Order that requires it to pay specified amounts to the creditor at specified intervals.

If the above Order is not complied with, the Council can take further enforcement action such as making an application to the Court to have property (both personal/real) sold by the Sherriff.

Alternatively, the creditor may commence action to bankrupt or wind up the debtor for insolvency. This may lead to a recovery of the debt from the sale of the debtor’s assets. Supplier’s considering going down this path should be aware that in light of the effects of COVID-19, the Australian Government has introduced the following changes to the bankruptcy and corporate insolvency regimes, effective from 25 March 2020 for a period of six months:

Bankruptcy – Individual Debtor

• The threshold amount for a creditor to commence the bankruptcy process (i.e. issuing a Bankruptcy Notice and then bankruptcy proceedings) against an individual debtor has increased from $5,000 to $20,000.
• Individual debtors will have six months to pay the amount owing once served with the Bankruptcy Notice, instead of the normal 21 days.

Insolvency – Company Debtor

• The threshold amount for a creditor to commence the insolvency process (i.e. issuing a Statutory Demand and then winding up proceedings) against a company debtor has increased from $2,000 to $20,000.
• Company debtors will have six months to pay the amount owing once served with the Statutory Demand, instead of the normal 21 days.

The above changes provide substantial relief for debtors in the current climate. However, they are likely to cause delays in creditors seeking to recover debts owing to them. Accordingly, creditors should be wary of relying on these debtor recovery process except as a last resort.

Final comment

Norman Waterhouse Lawyers understand that these are difficult times and that the usual game plan for the recovery of debts owing by customers may not apply. Businesses may want to provide indulgences to debtor customers to reward past loyalty and because, with an eye on the future, it may make business sense to do so. However, this should be done intelligently and carefully by businesses which are prepared with comprehensive and reliable trading terms, and not as a result of pressure brought to bear by those who seek to take advantage of these difficult times.

We have 100 years of experience in assisting businesses in South Australia and beyond to:

• prepare comprehensive trading terms which can be relied upon in tight financial times;
• understand how to register security interests on the Personal Properties Security Register and to properly manage those registrations;
• conduct a risk assessment when dealing with debtor customers seeking financial indulgences or avoiding payment;
• negotiate and document revised terms with debtor customers whilst providing adequate protection for the creditor;
• recover debts which creditor’s ultimately seek to recover.

We can help you with all the issues raised in this publication so that you can focus on other important aspects of your business.

For assistance in reviewing and preparing your terms of trade and variation agreements, please contact Johanna Churchill (0419 811 446) or Stefanie Magliani (0467 490 991) and for assistance in dealing with debtors and debt recovery, please contact Vas Marinos (0447 613 877) or Tom Burke (0467 490 991).