As a business owner, you will inevitably have to manage customers who do not pay their invoices on time. This can cause major problems for your cash flow, so it is important to know the legal procedures available to you to recover a debt. This article will provide a summary of your options to enforce a payment and provide some general guidelines to consider.

Step 1: Communicate Directly With the Customer

If you have a large volume of clients and frequently find yourself chasing invoices, you should consider putting in place a clear procedure where you send out polite reminder letters, and regularly follow up on outstanding accounts.

If you are trying to resolve a particular outstanding account, you should contact the client directly. When discussing the debt with them, make sure that you communicate clearly. You should seek to understand exactly why they have not paid you yet. Common reasons include:

  • poor internal processes, miscommunication between departments, and general lack of organisation;
  • a genuine inability to pay due to circumstances of financial hardship; or
  • a concern or dispute with the invoice itself, or the nature of the goods or services that you have provided.

Make sure that any of your discussions are documented. It is best to communicate in writing, however, if you speak on the phone, make sure that you keep a note of the discussion and send a follow-up email confirming the points that were discussed. 

Hopefully, your discussions will be able to lead to a resolution, such as:

  • payment in full; or 
  • an agreed payment plan in.

Alternatively, if the invoice is disputed, you can learn about the other side’s point of view, which will inform your strategy moving forward. Either way, if you have to take further legal action, it is useful to have a clear record of your conversations with the customer.

Step 2: Send a Legal Letter

If you feel that you have exhausted your internal options, you can ask a lawyer to send a formal letter. This type of letter is usually called a letter of demand, and it will include the following information:

  • the exact amount that the customer owes;
  • any interest payable and the interest rate;
  • the deadline for the customer to pay or provide a response (usually between 7 and 28 days); and
  • what action you will take if the issue is unresolved, such as suing to recover the debt.

When you send a letter of demand, you are signalling to the debtor that you are taking the matter seriously. Hopefully, the gravity of a formal letter on a law firm’s letterhead will be enough to spur the debtor into action. This could be by:

  • paying the debt in full; or
  • engaging in a discussion with you to find a compromise.

Sometimes, they may dispute the matter and shoot back with allegations of their own. Again, learning about the other side’s point of view is useful because it informs your strategy moving forward, particularly if you plan on going to court.

Step 3: Commence Legal Proceedings

If the other party ignores your letter of demand or disputes the matter, you may enforce a payment by suing them. In New Zealand, the appropriate forum to sue for unpaid money will depend on the size you claim. For claims:

  • $30,000 or less, you can commence proceedings in the Disputes Tribunal, which is quicker, cheaper and less formal than court (but can still make legally binding determinations);
  • $350,000 or less, you should go to the District Court, which, in addition to assisting with debt recovery, can also assist with arguments over money and complex commercial transactions; and
  • above $350,000, you will need to go to the High Court.

Once you file a claim in a tribunal or court, you will need to serve the claim directly on the debtor. This can be done by post if the debtor is a company. If they are an individual, you will need to engage an agent to serve the documents on them directly.

Following that, the debtor will have a set time period to prepare a defence. If they do, the parties will engage in the litigation process, which can be lengthy and complex, before the court makes a judgment. If they do not file a defence within the set time period, you will be able to obtain a default judgement.

The court process can be complex, even for a straightforward debt recovery case. You should always seek legal advice before commencing proceedings.

Step 4: Enforcement of a Judgment

If the courts or Tribunal make a judgment in your favour and the debtor still does not pay you, you can apply to the Court to take further action to enforce the judgment debt. In particular, if:

  • you know who employs the debtor, you can apply for an attachment order, which tells the employer to transfer money from the debtor’s wages to you;
  • you know the debtor owns property, you can apply for a charging order to make it difficult for them to sell that property until the debt is paid;
  • the debtor is an individual, you can take steps to bankrupt them. The first stage of this process is to issue a bankruptcy notice;
  • you know the debtor has assets, you can apply to the court for a warrant to seize property; or
  • the debtor is a company, you can take steps to have their company wound up in insolvency. The first stage of this process is to issue a statutory demand for the payment of debt.

If you need more information before deciding which enforcement action to take, you can also apply for and a court order to have the debtor brought before the court Registrar and examined about their financial situation. 

Most Effective Options

Statutory demands and bankruptcy notices are commonly seen as the most effective enforcement options. If a debtor ignores one of these notices for a certain time period, you will be able to apply to the court to:

  • wind the debtor up, if it is a company; or 
  • bankrupt the debtor, if they are an individual.

The end result for both will will be the Court appointing a professional to sell the debtors assets and distribute the remaining money to all creditors, including you. Bankruptcy notices and statutory demands are therefore seen as the most effective enforcement tools, because they are risky to ignore and provide a strong incentive to respond.

Sending a Statutory Demand Without a Court Judgment

In some circumstances, you can send a statutory demand to recover debt from a company without getting a court judgment first. This is one of the fastest ways to apply pressure to a company to pay a debt. If they ignore it, it leaves them exposed to being wound up. 

However, it can be a risky strategy, because if the statutory demand does nott meet certain requirements, you could get dragged into costly court proceedings. You should therefore seek professional advice before sending a statutory demand without an accompanying court judgment.

General Considerations

Before you consider suing, you will need to do a cost/benefit analysis. Consider the following:

  • does the debtor have money to pay you back? When a debtor becomes insolvent or bankrupt, they may not be able to satisfy the debt;
  • if the matter is disputed, do you have evidence to support you claim? If not, your claim may be unsuccessful and you could end up with high legal bills; and
  • are the estimates of the costs of court proceedings (and enforcement action) likely to outweigh what you stand to gain? Unfortunately, for small business claims, the legal costs can be prohibitive, particularly if the matter is disputed.

Key Takeaways

If you wish to enforce a payment for your business, you need to follow a number of steps. These include:

  1. communicating with the customer;
  2. sending a legal letter;
  3. commencing legal proceedings;
  4. enforcing the judgement.

Overall, there are a lot of variables involved in recovering a debt, and it is important to seek legal advice from the outset so that you can understand your options, and form a strategy which fits within your budget. If you would like legal advice as to how you can enforce a payment, contact LegalVision’s New Zealand disputes lawyers on 0800 005 570 or fill out the form on this page.

FAQs

How should I start when looking to enforce a payment?

The best first step to take when looking to enforce a payment is to contact the customer directly to explain the situation. When discussing the debt with them, make sure that you communicate clearly. You should seek to understand exactly why they have not paid you yet.

What is a letter of demand?

If you feel that you have exhausted your internal options, you can ask a lawyer to send a formal letter. This type of letter is usually called a letter of demand, and signals to the debtor that you are taking the matter seriously. 

What happens if the customer still refuses to pay?

If the other party ignores your letter of demand or disputes the matter, you may wish to sue them. In New Zealand, the appropriate forum to sue for unpaid money will depend on the size you claim.

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