If you’re in the building and construction industry, debts are particularly bad for business. Without the timely payment of payment claims, a business’ cash flow may take a dive. This can be disastrous in an industry that is characterised by multiple layers of contracts, such as supply and subcontract agreements, where the late payment on one has a direct impact on a business’ capacity to perform its obligations for another.
Pursuing a debtor that owes you for construction works and services is unproductive as it wastes time, effort, and more often than not, money. It’s unfair, unjust, and simply uncommercial. When weighing up the ancillary costs to recovering a debt, a business may decide to cut its losses and concede the debt. Regularly conceding debts can be a dangerous business practice that may slowly cripple a business, regardless of whether they seem insignificant at the time. This is because all debts that are written off will accumulate over time to potentially leave a business with significant cash flow problems.
There are federal and state-based legislative avenues of debt recovery that, when exercised appropriately, can secure the payment of a debt with relative ease.
Statutory Demands and the Corporations Act 2001 (Cth)
Serving a statutory demand on a defaulting company is often the first option contemplated by a creditor. Though not exclusively a means of debt collection, our experience has shown that a valid statutory demand will often secure the payment of a debt. This is because a debtor company that fails to pay or dispute the debt within 21 days leaves itself open to serious consequences, none more so than the possibility of being deemed legally insolvent and subject to winding up proceedings. Any such proceedings must be commenced by the creditor’s legal practitioner/ representative in the Supreme Court of the relevant state jurisdiction.
A problem with a statutory demand is that it will fail if it does not strictly conform to the rules set out in the Corporations Act. To comply with the Act, a statutory demand must, amongst other things:
(a) be in writing;
(b) be in the prescribed form;
(c) be signed by or on behalf of the creditor;
(d) accurately specify the value of the debt; and
(e) be accompanied by a properly constituted affidavit verifying that the debt is due and payable by the debtor company.
What’s more, if the debt’s existence or amount is found to be the subject of a ‘genuine dispute’, the debtor may apply for the demand to be thrown out of court. The legal threshold for determining that a genuine dispute exists is relatively low. In our experience, courts will be satisfied as to the existence of a genuine dispute if the dispute is ‘real and not spurious, hypothetical, illusory or misconceived’. The consequence of the threshold being met is twofold – not only will the demand be set aside, it is likely that the creditor will be ordered to pay the debtor’s legal costs.
Security of Payment
Each of the Australian states and territories has its own unique security of payment legislation. In NSW, the laws regulating security of payment can be found in the Building and Construction Security of Payment Act 1999 (NSW) (SOPA). SOPA sets out the rights and obligations of principals, head contractors and sub-contractors when it comes to debt recovery for construction contracts carried out in NSW.
Under SOPA, a creditor that chases a debt can reasonably expect a result, one way or another, within a month. SOPA sets out specific timeframes for issuing payment claims, receiving payment schedules and, if necessary, initiating adjudication proceedings. SOPA can be an extremely useful avenue to getting paid, provided that a creditor diligently stays on top of the legislative requirements. These include items such as ensuring that:
(a) the works must have carried out in accordance with the contract to which they relate;
(b) a valid payment claim for the works has been issued to the debtor on an agreed to ‘milestone’ or ‘reference’ date; and
(c) the debtor is afforded the minimum period of 10 business days from receipt of the payment claim to serve a payment schedule on the creditor, if it disputes the value of the payment claim.
Our experience is that creditors, busy completing the project, other jobs or negotiating prospective contracts, often slip-up by simply overlooking SOPA’s requirements. As with statutory demands, SOPA is only as effective as the creditor is diligent in observing and complying with the relevant legislative processes and requirements.
Bryks Lawyers helps its clients avoid defective statutory demands and unrewarding SOPA experiences. Contact our experienced team today for assistance in recovering outstanding debts.
This information is for information purposes only and is not legal advice. You should obtain advice that is specific to your circumstance and not rely on this publication as legal advice. Please contact us if you wish for us to advise you on any issue you may have arising from this publication.