A significant number of businesses in Australia are financially struggling to survive in this economic environment due to rising number of debtors. In general, business owners tend to procrastinate the issue of recovering debts from their debtors.
This month’s newsletter focuses on the legal implications of businesses’ decisions to procrastinate recovering debt(s) from its debtor. It aims at alerting business to exercise their right in a timely manner to be successful in any action against its debtors.
My client, who operates a business of supplying office stationery to other businesses, met me last week to discuss an outstanding debt that another business owed his business.
My client supplied this business with significant stationery every month for the past seven to eight years and had some unpaid invoices during this period of time. My client queried whether his business was within time to initiate legal proceedings to recover these debts from the other business.
What does the Law say?
In Western Australia, the Limitations Act 2005 prescribes a general limitation period of six years to recover debts arising from a contract. A ‘limitation period’ is the maximum time that a person or entity has to enforce its legal rights from the time the cause of action arises. A ‘cause of action’ will arise when all facts required to establish a particular claim come into existence.
In general, the terms of a contract between parties dictate when the debt becomes due and payable by one party to another. A debtor’s failure to pay monies by the due date constitutes a repudiation (refusal by the debtor) to fulfil his obligations in the contract. The person entitled to receive the monies (the creditor) may terminate the contract giving rise to a ‘cause of action’ to recover the debt. The creditor has a ‘limitation period’ – maximum time of six years from the date of non-payment to initiate appropriate proceedings against the debtor.
If any claim lodged after substantial delay were to be permitted to proceed, it could potentially raise problematic effects on the administration of the court proceedings, namely the accuracy of the evidence presented and statements of witnesses.
When parties have an ongoing relationship over a long period of time, the contract may incorporate multiple promises by a debtor to pay monies to the creditor resulting in accumulating debts. These accumulating debts run from day to day and anticipate that further debts will be incurred.
In the event a debtor of an accumulating debt, the creditor has the discretion to either:
accept non-payment by the debtor and terminate the contract; or
not accept the non-payment by the debtor and affirm the contract between the parties.
If a creditor makes a decision to affirm the contract it may subsequently terminate it should the debtor continue to repudiate it or after the creditor has followed any termination processes set out the contract. In case of accumulating debts, the limitation period of six years begins to run from the date the creditor terminates the contract and not from the date the debtor fails to pay the debt.
The limitation period can be extended in a number of circumstances. A common example being a confirmation from the debtor before the expiration of the limitation period. The Limitation Act prescribes that debtor’s confirmation must either be by way of:
a written acknowledgement that the creditor has a right to the debt; or
a payment to the creditor towards the debt(s) owed.
A limitation period to recover debts seeks to balance the interests of all parties and the effective administration of justice. A delay in looking to commence court proceedings will result in any creditor missing the limitation period and losing its ability to enforce its legal rights.
Our discovery and outcome
A discovery of my client’s accounts revealed that the unpaid invoices had spread over a few years with some more than six years old and some within the six years period.
My client had never terminated the contract with its debtor by following the termination processes set out the contract. I advised and assisted my client in formally terminating the contract and initiated proceedings on its behalf to recover the debt.
Takeaway message
Calculating a limitation period to commence legal proceedings can be simple or complex depending on the cause of action and the circumstances of each matter. We strongly recommend that businesses should not delay in looking to commence court proceedings because if it does, the business may miss a limitation period and lose its ability to enforce its legal rights. Time is of essence!
We have extensive experience in providing these services to a wide range of clients and would be glad to assist you with your debt recovery efforts.
Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.