Resolving customer debt disputes

How to work towards achieving the best result for your business

If you’re a business person, it’s almost certain that you will have had to deal with late payments from customers or clients for goods and services you supply. And in most commercial situations, enforcing the debt can be a fairly straightforward process.

However, one element of debt recovery that’s often overlooked is the commercial implications that may arise from taking an adversarial course of action, as opposed to a collaborative approach (which may be more appropriate in the circumstances). 

In this blog post, MDL’s Matthew Hunter suggests ways to approach a debt dispute, to give your business the best chance of recovering debt while preserving the relationship with your customer. 

“We’ve all been there” with debt recovery

The first thing to remember is that, more often than not, “we’ve all been there”. For example in the retail sector, the ebb and flow of the market can mean a business is low on cash during some periods of the year, and cash-rich during others. 

That’s why when you’re owed a sum by a debtor, as a creditor you should look at the situation holistically. Ask yourself these basic questions: 

  1. What is the sum owed? Is it a small or large amount in context?
  2. What is my previous experience with the debtor? Are they a long-standing client with a positive payment history?
  3. What is my current financial position, and is the sum of the debt required immediately?
  4. Do I wish to continue my relationship with the debtor?
  5. What is my best and worst alternative should I wish to cease my relationship with the debtor?

While this isn’t an exhaustive list of questions, the answers to these will greatly affect:

  • The appropriate course of action to take in the circumstances
  • Whether a commercially beneficial outcome may possibly be negotiated, or
  • Whether it is appropriate to seek immediate recovery.

Consider the sum of the debt owed

This is the most critical question to ask, because the total amount of debt will determine (in a worst case scenario) the court or tribunal with jurisdiction to hear the matter, should the dispute be litigated.

Generally, the higher the court, the higher your costs will be to pursue the debt. What’s more, with respect to legal costs, each court has different rules and scales as to what is recoverable.

For example, if you pursue a debt in the Queensland Civil and Administrative Tribunal (QCAT), legal costs are generally not recoverable in relation to the preparation of approved tribunal forms. For this reason the costs of preparing an application may outweigh the debt itself. 

There is the further issue that even when a decision is made in favour of a creditor, should the debtor still fail to pay the debt, the creditor will be required to pursue enforcement proceedings to recover it. Again, this would incur further costs as it is a separate proceeding.

How to approach your initial correspondence

Initial correspondence by way of letter is the first step in resolving a debt dispute.

Remember that the contents and tone of the letter are critical.

Note that we don’t suggest using the term ‘letter of demand’. That’s because the manner in which the initial letter is drafted will often have a considerable impact on the total time and expense you incur in recovering a debt.

This begins with the title of the correspondence – preparing a letter ‘demanding’ payment may not always be the best way to go about seeking a resolution.

As another example, let’s say you’re a lessor with a tenant who is behind on rent due to a slow sales period. In the long term, it may commercially benefit you to liaise with your tenant and propose a payment arrangement – rather than terminating the lease and having to find an alternative tenant.

This being said, there are some situations where you may find the latter course of action is the most appropriate.

Need help with your business’s debtors? Contact MDL

Reining in your debtors can be a daunting task for any business. At MDL we understand that not all situations are black and white, which is why we’ll work with you to facilitate the resolution of all your commercial debt disputes, to serve your business’s best interests.

To find out more about our dispute resolution and debt recovery services, contact McCarthy Durie Lawyers on 3370 5100 or fill out the contact form here.