Debt Collection in Australia

• Compared to international expectations the payment behaviour of national companies is balanced. On the other hand,  delays record a deteriorating trend and average DSO is now at 50 days.

• The judicial system is challenged by the federal structure and does not provide for the fast-track arbitration for indisputable requests. The courts are in general  efficient but delays and costs tend to be significant and it can be difficult to enforce foreign judgments.

• Insolvency proceedings are complex and onerous, with very low chances of recovery.

1. Summary

1.1. General financial information

1.1.1. For several purposes, it is difficult to obtain appropriate financial information on domestic companies. Next, only stock exchange-listed companies have a duty to report their financials, so only 2% or 3% of Australian businesses print or disclose annual or semi-annual reports publicly. Second, companies sometimes rely on confidence mechanisms that are not legal entities that tend to restrict oversight and transparency in their own right. In comparison, the vast majority of Australian traders ' portfolio is made up of small and medium-sized companies, whose financials are proprietary and can only be accessed by our analysts by direct approach or credit reporting agencies.

1.2. Key legal structures

1.2.1. Corporate debt responsibility is defined by legal structures listed as follows:

• Proprietorship is generally used for small-scale businesses as it is focused on the personal qualities of the sole proprietor controlling the business assets. The proprietor is therefore fully liable for the actions and expenses of the company.

• Partnerships require up to 20 partners to conduct business together The parties carry out mutual responsibilities and privileges under a common' partnership agreement' but do not create a separate legal entity. Unless a Limited Partnership is formed, the responsibility of the parties is mutual and indefinite, even if one party creates business obligations without the knowledge or consent of the other participants.

• Proprietary Limited Companies are very common mechanisms that can have one to fifty shareholders created. There is no minimum requirement for money, and the owners are responsible for their investment. Organizations provide another formalized legal structure in which the securities can be exchanged and liability is restricted to donations to investments.

• Trusts are particular arrangements in which activities are governed by an arrangement (deed) and where the trustee I retains the trust's properties and (ii) performs the company for the benefit of the beneficiary. Trusts are complex structures that often seek to minimize taxes however, over time, the courts have become suspicious with their practices and the trustees are increasingly held personally responsible for the obligations of the company.

• International companies may also reside in Australia through a Representative Office (which can not generate income) or a Branch (which is autonomous and allowed to conduct business).

• Joint ventures vary from collaborations in order to combine their capital and expertise to build a common project and produce a mutual profit without actually creating a separate entity.

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1.3. Regulatory framework

1.3.1. The Australian court system can be complicated since the country has a federal government framework and is comprised of two independent regions (the Northern Territory and the Australian Capital Territory) and six reserve-run sovereign states. Each one has its own legal system and rules, which sometimes adds complexity despite ongoing attempts at harmonization. There are no separate industrial tribunals, but some specialist sections operate within established courts (i.e. the Industrial Register, the Admiralty Court, etc.).

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1.3.2. Hence, large commercial cases are usually brought before the Federal Court of Australia (the FCA sits in all capital cities) or the Supreme Court in one or another state, based on the quantity of the argument and the purpose of the case.

1.3.3. Nonetheless, as a general rule, Local Courts or Magistrates Courts (names may vary from state to state) are able to decide claims up to AUD 40,000 in South Australia, AUD 100,000 in Victoria and New South Wales, or AUD 150,000 in Queensland. District courts will determine claims up to AUD 750,000, while Supreme Courts will match disputes above AUD 750,000.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. Domestic companies' payment behavior remains good compared to international standards, with payments normally occurring in Australia within 30 days on average (measured from the end of the month in which goods are delivered or services are provided). However, the trend in payments with average DSO at 50 days for 2016 is deteriorating.

2.2. Late interests

2.2.1. Government agencies are required to pay small businesses within 30 days of receiving a duly made invoice, or penalty interest can attach (as set out in section 22 of the Taxation Administration Act 1996). Nonetheless, matters relating to late payment are not controlled in business-to-business agreements and must be addressed directly by the parties.

2.3. Costs of debt collection

2.3.1. Costs of debt collection are usually not chargeable to the debtor unless the contract sets out exactly which costs can be considered. The damages are often not retrieved as the sides tend to resolve disputes in an amicable way, but they are also useful bargaining mechanisms.

2.4. Protecting ownership

2.4.1. Contractual conditions (also known as Romalpa clauses) on preservation of title (RoT) guarantee that a consumer only acquires possession of property after payment has been obtained in full.

2.4.2. Such agreements may be activated both during and beyond insolvency proceedings, but there is a growing formality added to these provisions, which must therefore be treated with the utmost care. In fact, the Personal Property Protection Act 2009 (Cth) (PPSA), which entered into force in January 2012, established a clear requirement for product vendors to report their protection interests in order to insure that the assurance is successful.

2.4.3. However, only the RoT contracts reported with the Personal Property Protection Registry secure the interests of the seller (called a' purchase money protection interest,' or PMSI) by granting the borrower 'absolute preference' over the debts of other creditors. However, super priority allows the processing to be done before the products are shipped (PPSA s.62), and only refers to goods that have been left unpaid for. Retention of Title clauses included in contracts signed since January 2012 has lost their effect unless reported by January 30, 2014.

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2.5. Payments

2.5.1. The most common methods of payment are as follows: Most transactions in Australia take place on open account, which means the goods are shipped and delivered before payment is due. EFT electronic funds transfer and swift bank transfers are otherwise among the most common means of payment worldwide, as they are quick, safe and supported domestically and internationally by an increasingly integrated banking network. Transfers can be covered by an Export Credit Insurance policy on export purchases, which can minimize the risk of immediate or accidental insolvency of the buyers.

2.5.2. Furthermore, Standby Letters of Credit (a bank guarantees the creditworthiness and redemption ability of the debtor) are valid assurances that can be interpreted as a sign of good faith as they can be enabled as a' payment of last resort' if the borrower fails to fulfill a contractual obligation. In fact, Confirmed Documentary Letters of Credit (a trustee promises that a certain amount of money is made available to a borrower through a bank once certain provisions have been specifically agreed upon by the parties) may be accepted as it can be easily obtained from local banks (may be expensive).

2.5.3. In Australia, searches are hardly used except, maybe, by sole traders. Bank guarantees may usually be secured fairly quickly although they may be costly depending on the issuing entity.

3. Collecting payments

3.1. Amicable action

3.1.1. Amicable settlement opportunities should always be seen as the most effective alternative to formal litigation proceedings since Australian law does not provide for fast-track legal proceedings. In fact, the Australian courts have developed various mechanisms of pre-legal action (under the 2011 Civil Dispute Resolution Act) to allow the parties to discuss and resolve contractual conflicts prior to the start of a court.

3.1.2. Before initiating legal proceedings against a debtor, asset assessment is important as it allows verification of whether the company is still active and whether chances of recovery are at best. Moreover, it is essential to be aware of the solvency status of the debtor: if insolvency proceedings have been initiated, the enforcement of a debt (see below) is indeed impossible.

3.1.3. For undisputed debt above AUD 2,000, creditors may alternatively send the debtor an application (Statutory Demand) to pay within 21 days and threaten to file a winding-up petition if the deadline is not met (as per section 459E of the Corporations Act 2001).

3.2. Legal proceedings

3.2.1. Ordinary proceedings. In case an amicable phase fails, or if the debtor questions the claim, the option to initiate legal proceedings remains, although it tends to be lengthy and expensive when defending the claim.

3.2.2. Usually, ordinary litigation will take place as follows: although there is no requirement to seek reimbursement in writing until civil action is taken, it is desirable to have a letter of claim reflecting the principal and interest owed. To initiate legal proceedings, the claimant must be provided with a Statement of Claim, which must either meet with the ruling or submit a defense within 30 days (delays may be given based on regional factors). The debtor's inability to abide by the rules entitles the borrower to ask for a default judgment. Then, the court will schedule trials and set a timeline for the trial (discovery process requiring the participants to be interviewed by attorneys, mediation).

3.2.3. Remedies ordered by the court may take the form of compensatory damages, limited enforcement orders, punitive injunctions or compensation orders. For civil actions punitive damages are possible but are unheard of in bankruptcy court trials.

3.2.4. It is also worth adding that launching the case in the debtor's position of incorporation before the appropriate court usually helps avoid legal complications due to lack of claims over jurisdiction. Also in Australia, class action (lawsuit against a group) lawsuits are becoming more common.

3.2.5. Required documents: Copies of unpaid invoices, final payment declaration, a copy of the contract of sale, copy of the credit application, evidence of production if required (AWB BOL for export)

3.2.6. Time limits. Debt-related requests must be taken before the court within six years, beginning from the original due date. Legal action will not be given beyond this time limit although certain conditions (for example, publicly accepting debts) may disrupt the specified timeframe in certain situations. The permissible period in the Northern Territory is reduced to three years.

3.2.7. Precautionary measures. Pending a definitive and enforceable decision, precautionary measures in the context of provisional injunctions may be issued to preserve the status quo. Mandatory and prohibitory injunctions may force or forbid a defendant from doing something else, but although they are typical in situations involving Intellectual Property or Trade Practices, they are uncommon in debt proceedings.

3.2.8. It allows the claimant to show, inter alia, that in the absence of an order, pure penalties would not be adequate to account for potential losses. Search orders (Anton Pillar directives), given when the individual appears expected to hide or damage critical evidence, are extremely rarely granted. Stay orders prohibit a party from beginning or continuing proceedings on a temporary basis while anti-proceedings injunctions preclude a party from starting or continuing proceedings in a foreign jurisdiction. Additionally, temporary connection orders (also called freezing orders) help preserve properties that should be used to fulfill a final judgment but are at risk of dissipation or frustrate compliance.

3.2.9. Nevertheless, it is important to note that a freezing order does not provide any exclusive privilege over the seized assets in favour of the defendant should the legal action progress to liquidation proceedings. Therefore, if the claimant is defeated, they may be responsible for the impairment and harm the debtor has suffered as a result of the freezing order.

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3.2.10. Accordingly, courts may require borrowers to provide expense security to protect debtors from reckless behavior.

3.2.11. Appeal lodging.  Appeal is usually available when a decision is influenced by a mistake in law or fact, while procedures can differ from court to court. Appeals to decisions rendered by Federal Courts at first instance are checked individually by a Full Court (three judges). In contrast, appeals against judgments made in the first instance by the Supreme Court of the States are examined in the Appeal Division of the same Courts (in South Australia or Tasmania, appeals from first instance judgments in the Supreme Court are considered by the Supreme Court of the Full Court).

3.2.12. Finally, decisions rendered by Appellate jurisdictions in second instance may be brought before the High Court (usually competent in constitutional matters) provided that special leave has been granted.

3.2.13. The time limits for filing an appeal vary from one state to another, although leave for appeal will generally be sought within 45 days or three months after the parties have been informed of the ruling. Generally, this arbitration arrangement tends to make dispute hearings difficult and expensive.

3.2.14. Enforcing court decisions. A judgment can be enforced as soon as it becomes final (i.e. when the appeals are no longer available). The judgment claimant may pursue implementation of a municipal verdict by Review Notices, Garnishee Instructions, or Writs of Execution for up to twelve years.

3.2.15. Examination orders are useful tools as they can force the debtor to provide information about their financial situation and assets, thereby helping us choose a strategy for recovery. After the verdict has been reached the decision must be sought from the judge.

3.2.16. The court may also grant a Garnishee Order authorizing the borrower to reclaim his loan immediately from the debtor's bank account (or salary) as well as the debtor's fees before settlement of the principal and interest. However, the procedure is best used in practice after having examined the company's books and records in court (Examination Order).

3.2.17. Eventually, the court can issue a Warrant of Execution for the Property Levy, which orders a sheriff to seize and sell the debtors ' property to the creditor's gain. The payment to the sheriff comprises fixed fees (less than AUD 100) as well as a proportion of the profits. The interference of the sheriff sometimes forces the debtor to arrive at an agreement (instalments) to prevent arrest, but the debtor would decide to file an application to set aside the verdict. Generally such charges are added to the debt owed by the debtor.

3.2.18. Even debts can be recovered through insolvency proceedings. However, a certificate of judgment may be attached to a Creditors Statutory Request which allows the debtor to pay the debt safely or increase it within 21 days. Failure to do so would constitute prima facie proof of insolvency and give grounds for a request for winding-up.

3.2.19. The duration of a judicial action. Simple claims would normally be settled within two to four months but controversial claims may last more than a year. Furthermore, compliance actions may take six to nine months in which the debtor's properties are hard to identify. Foreign litigation will always take longer and cost more than domestic litigation–the disparity will rely on many aspects that could be quantified on a case-by-case basis and meaningfully.

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3.2.20. The costs of the procedure. Procedural costs that vary from the laws of one state to another, but in ordering costs, the courts have wide discretion. As a general rule, the unsuccessful party is asked to pay the successful party's reasonable legal costs, but in practice, they are charged approximately 60 to 70 percent of the costs effectively, unless the courts calculate costs so as to grant compensation to the winning party (which can then recover 100 percent of its costs).

3.2.21. Efforts (whether positive or negative) made during the amicable pre-legal talks are typically taken into account when determining expenses. When mentioned earlier, the statute does not authorize the introduction of automated collection costs and benefits unless the collective agreement has been reached. Nevertheless, the law allows borrowers to apply a fixed amount to the lawsuit before lodging a petition with a judge and reclaim legal fees once an enforceable final decision has been made. Costs are usually left aside in practice since paying the debt is what matters most. Court fees are controlled, and each state or local government sets the' size costs.'

3.2.22. These are released on the registry of the relevant case. Having a lawyer can be a good way of lowering the risks of the treatment. Conditional contracts where lawyers are not paid up front but rather collect a fixed sum of performance (i.e.' no-win-nofee') are typical in different court trials, but not in cases of debt recovery. Contingent payments that allow legal professionals to earn a share of the final reward may be prohibited by law based on the jurisdiction in question. This prohibition normally does not apply to companies that fund litigation.          

3.3. Alternatives to legal action

3.3.1. ADR mechanisms. Alternative Dispute Resolution Methods (ADR) are popular in Australia but remain unused in debt litigation so far. Nevertheless, as mentioned above, the parties have a duty to meet with a view to settling their disagreement before formal legal action is taken. However, the parties can depend on mediation and arbitration on a voluntary basis or on a court invitation to settle contractual conflicts by informal proceedings.

3.3.2. A mediator is named in mediation cases (by the parties or by a court) to help the parties find an acceptable compromise, but it has no authority to make decisions for the parties. The arrangement between the parties is binding, and confirmed by the mediator.

3.3.3. In comparison, in arbitration cases the arbitrator is named by the parties and given authority on their behalf to settle the dispute. The arbitral award is therefore final, binding, and enforceable by domestic tribunals. Arbitration criteria for international disputes comply with the UNCITRAL Model Law on Legal Commercial Arbitration published in 2006.

3.3.4. Foreign forums. In principle an international tribunal (i.e. under a foreign law or before a foreign court) may be called as a consequence of the difficulty in obtaining appropriate rulings from domestic courts when the argument is contested.

3.3.5. Nonetheless, Australian courts usually accept the rules of international jurisdiction as decided by the parties to a deal until public policy considerations preclude the application of the law of the selected venue (or the legislature has enforced exclusive interpretation of Australian law as regards consumer protection matters).

3.3.6. However, it is essential that the agreement is characterized by an international connection (for example, one party has elected domicile in another country, or the place of execution is located abroad), and that a clause of jurisdiction is drafted for this purpose.

3.3.7. Award enforcement. In Australia, enforcing foreign awards may be a time-consuming exercise, and the use of domestic courts may sometimes remain faster than obtaining and enforcing an award abroad through an exequatur procedure. The regulation of international judgments in Australia is generally regulated by the rules of both the regulatory frameworks (the International Judgments Act 1991 and the Foreign Judgments Regulations 1992) and the Common Law. Global prizes must first be officially registered with an Australian tribunal and recognised as a domestic and enforceable decision (exequatur).

3.3.8. The foreign award has to be a final and definitive judgment on money. The grant must of course be enforceable in the awarding court's nation but it must have been unenforced.

3.3.9. However, acknowledgement usually relies on whether Australia and the authorizing government have a mutual acknowledgment and compliance arrangements. Therefore, unless the issuing country is specified in the 1992 Regulations, judgement from its courts in Australia will not be enforceable.

3.3.10. Australia is a signatory of the 1958 New York Convention on the Recognition and Execution of Foreign Arbitral Awards. Domestic courts should therefore therefore accept and uphold rulings made in international arbitration proceedings.

4. Managing insolvent debtors

4.1. Insolvency in Australia

4.1.1. In Australia, insolvency is merely a matter of cash flow and Section 95A of the Corporations Act 2001 (Cth) notes that a corporation is viable if (and only if) the company is able to meet all its creditors when they become due.

4.1.2. Insolvency cases are expensive and complicated, and are typically used as a final resort. Nevertheless, a registry of insolvent firms is given by the National Personal Insolvency Register (a public index in electronic format).

4.1.3. Hence, the danger of launching insolvency proceedings (through a letter of contractual demand) may be an effective means of exerting pressure when accumulating unpaid debt. Throughout fact, insolvency cases tend to follow a final judgment that arise from the inability of the claimant to satisfy a prescribed requirement within 21 days (in which case proceedings are taken before the Federal Court). Section 459P of the Corporations Act makes way for different prosecutions.

4.2. Insolvency cases

4.2.1. Out-of-Court proceedings. Informal out-of-court litigation may be carried out but both shareholders would have to consent to conduct a deed so that only one borrower may override such an agreement. Unlike a Deed of Company Arrangement (DoCA), any subsequent liquidator would not provide the investors with immunity against unjust advantage allegations.

4.2.2. Debt restructuring. Restructuring the debt collection process is a first probability of payment. Upon enforcement of a general security agreement (debenture) a receiver is nominated and takes over management of the company until the debt is repaid or recovered. If the process fails, a liquidation process may commence.

4.2.3. It is also possible to reach a court-sanctioned scheme of agreement between investors and the company. It becomes successful once the agreement has been accepted by the requisite plurality of creditors (at least 50 percent in number and 75 percent of creditors' interest in each class) and the tribunal has ratified the contract.

4.2.4. Nevertheless, all investors who did not vote in favour of the agreement remain obliged, which may have significant consequences as the statute does not restrict how much of the loan is liable to be write-off. Voluntary management is the most common procedure since it helps to increase the likelihood of an organization maintaining its operations. The protocol suspends supervision by the owner in favour of a licensed administrator (appointed by the business itself).

4.2.5. Creditors and other parties are generally prevented from enforcing their rights during the moratorium phase, but commercial contracts are very common in allowing a party to terminate the contract if the other undergoes certain insolvency procedures. DoCA could eventually formalize a negotiated settlement that will then connect all unsecured creditors, including those who did not vote in favour.

4.2.6. Winding up proceedings. The parties can seek liquidation and contribute to the appointment of a liquidator to manage the business, keep the creditors updated and divide the properties. The enterprise is then deregistered. When named, the liquidator must notify prospective investors and disclose the date of delivery of a petition (for example, via newspapers). The liquidator may then accept or deny an argument, and would frequently ask for additional evidence supporting the right of the claimant.

4.2.7. Priority rules. Generally, priority rules apply when transferring the profits to the creditors. Secured creditors who hold a security interest (as defined in section 12 of the Personal Property Securities Act 2009) are given priority in liquidation proceedings against unsecured creditors. For example, expenses that flow from the insolvency proceedings constitute priority debts. Employees are a separate borrower class that has some degree of preference over protected and unsecured creditors.

4.2.8. Tax debts are considered unsecured and would be paid for only if there are sufficient funds left. Legal costs of the petitioning creditor (related to the insolvency proceedings) may be considered a priority and refunded to the creditor before dividends are shared.  

4.2.9. Cancelation of suspicious transactions (clawback). In addition, the liquidator can cancel different types of transactions completed prior to the proceedings during' suspicious times.' Of eg, transactions aimed at removing creditors within ten years of the proceedings, irrational decisions taken by the directors within four years of the proceedings, transactions benefiting one creditor over the other (unequal preferences) completed within six months of the proceedings, unfair loans, dishonest transactions etc. would be deemed troublesome. Incriminated contracts would then be invalid, and the borrower would be required to repay the sums at stake (a lawsuit against the creditor would be lodged).

4.2.10. Duration of  insolvency process. Delivering timeframes for reorganization-based litigation is challenging, but liquidation appears to be successful and relatively swift (on average from six to 18 months).

4.2.11. Required documents. Copies of unpaid invoices, last financial statement, a copy of the supplier contract, credit application form, evidence of production if necessary (AWB BOL for export)