The place for legal action and enforcement in the Post-COVID-19 world

By Roger Mendelson*

During the COVID-19 period (which is not fully over by any means), legal action was very largely placed on hold.

Although there were no restrictions during the period from March 2020 until January 2021 on taking out legal action, there were difficulties if an action became defended and a general feeling by creditors of “let’s put this on hold”.

Many creditors had a policy to not undertake any action which was likely to upset debtors or which may lead to adverse publicity.

In the circumstances, I am unaware of any adverse publicity arising from legal action over the whole COVID-19 period.

There were restrictions placed on issuing Statutory Demands and on Bankruptcy as an enforcement tool.

Statutory Demands had a temporary increase in the amount owing from $2,000.00 to $20,000.00 and the time period for response by the company was increased from 21 days to 6 months.

The bankruptcy minimum judgment amount was increased to $20,000.00 and the response time to respond after service of a Bankruptcy Notice was increased from 21 days to 6 months.

Needless to say, few creditors undertook either of these options during the COVID-19 period.

The restrictions were changed in January 2021.

The bankruptcy minimum judgment amount is now $10,000.00 (including costs and interest up to the date of the judgment) and the response period after service of a Bankruptcy Notice has been returned to 21 days.

Statutory Demands can now be issued for any amount owing by a company which is not subject to dispute of over $4,000.00 and the response period after service of the Statutory Demand is now 21 days.

It is apparent from the bankruptcy and wind-up figures that numbers have dropped very substantially and have not caught up in any way to preCOVID-19 levels. This means that there is either a back log brewing or another more likely explanation, is that many creditors are simply shelving action on prior claims.

What is the future of legal action in credit and collections?

There is no doubt that legal action is being used to a much lesser degree now than say 10, 20 or 30 years ago. Going back 30 years, legal action

was an essential tool of any collection system.

Today, it is used much less widely. Part of the reason is that many credit managers are not fully aware of the benefits of legal action because they have grown up in a different environment.

Legal action will in no way avoid the need for carrying out proper and careful credit checking. There is a strong argument that legal action is a significantly more effective debt collection tool now than it was in the past. The reason is that your customer is much less likely to be sued by other creditors. Thus, it is a question of the squeaky wheel gets the result because it stands out.

If your customer knows that it is unlikely that most of his creditors will sue him, he will be less likely to pay. As long has he accepts that there will be a negative credit report listing, then he really knows that he can avoid paying.

Thus, a creditor who does sue is more likely to achieve a positive outcome.

What are some of the benefits of legal action?

A judgment adds between 12 and 15 years to the enforceable life of your debt (depending on the jurisdiction).

Interest at high rates are added to the debt. For example, in Victoria, the prescribed rate under the Penalty Interest Rates Act is 10%.

The taking out of a default judgment will automatically lead to a credit default being recorded. This will often lead to action, sometimes several years later, when your customer seeks finance or a lease and is required to satisfy the judgment at that stage. To satisfy the judgment, the customer will be required to pay the full amount of the judgment, plus interest plus costs.

Don’t overlook the easiest enforcement path of all

If your customer has a reliable job, the easiest enforcement path in some states (example New South Wales) is Garnishee. In our experience, the success rate if the employment details are confirmed and the job is permanent is over 90%.

Again, the creditor which takes this action is the one likely to achieve a result, because most of the other creditors would not have gone to judgment and Garnishee.

Summary

There is a critical place for legal action in every debt collection system.

The reality is that legal action will need to be undertaken in only a very small percentage of outstanding debts.

The fact that your system allows for legal action to be undertaken will empower your collections system from the outset. That is, when telephone contact is made with the customer, he will be advised (politely of course) that unless he either pays the debt or enters into a meaningful instalment, it will cost him significantly more in legal costs and interest.

Bankruptcy for larger debts owing by individuals, particularly if there is an asset involved, such as real estate, is a critical process. Without it, many otherwise collectable debts will be written off unnecessarily. I am constantly amazed at how many files we handle, where instalment options and lump sum offers are rejected and yet when there is a hearing date for the Bankruptcy application, significant sums can be found.

The most overlooked tool is Statutory Demands. It is the only enforcement step which can be undertaken without firstly obtaining a judgment. It is quick and relatively inexpensive. If the company intends continuing in business, the directors really must deal with a Statutory Demand served on their company within 21 days.

*Roger Mendelson CEO of Prushka Fast Debt Recovery Pty Ltd; and Principal of Mendelsons National Debt Collection Lawyers Pty Ltd T: 1800 641 617 www.prushka.com.au