In brief - Your actions will depend on whether you acknowledge or dispute the debt

If you are contacted by a debt collector, you should be frank about what you plan to do. If you dispute the debt, you should get legal advice as quickly as possible.

Debt collectors don't go away if you ignore them

An approach from a debt collector can come in a number of different forms - a telephone call, a letter of demand, attendance at your home or place of business, a statement of claim or summons, a creditor's statutory demand if your business is a Pty Ltd or a bankruptcy notice if you are a sole trader.

The most important thing to do when you receive an approach from a debt collector is not to ignore it.

Avoiding an approach by a debt collector will inevitably result in an escalation by the debt collector. You should encourage contact with the debt collector and be transparent about the action you intend to take.

Do you acknowledge that the debt is due and owing?

If you acknowledge that the debt is due and owing, the first approach can usually be dealt with by contacting the debt collector and agreeing to enter into a payment plan with them.

If you dispute the debt, then it is important to obtain legal advice as quickly as possible. Depending on the size of the debt, a commercial settlement can usually be obtained in most cases.

It is imperative that you obtain legal advice immediately if you receive a bankruptcy notice, a creditor's statutory demand or a statement of claim/summons.

Bankruptcy notices, creditor's statutory demands and statements of claim

If you have been served with a bankruptcy notice or creditor's statutory demand, you have only 21 days in which to respond. A failure to respond can result in you being declared bankrupt or your company being placed into liquidation.

If you have been served with a statement of claim you usually have 28 days to file a defence. A failure to file a defence will result in default judgment being made against you or your company.

Make sure you update your company records with ASIC

If your company is a proprietary limited company, you should also ensure that the company details held by the Australian Securities and Investments Commission (ASIC) are correct and up to date.

The law requires that a creditor's statutory demand is served on a company at their registered office. Most companies list their accountant as their registered office. However, they rarely update their ASIC record when they change accountants.

I have witnessed a number of companies that have been placed into liquidation for a very small debt, only because they failed to keep their ASIC record up to date and therefore were not aware of the debt or the court proceedings. This most often happens on the back of a tax debt or workers compensation insurer audit.

Once a company has been placed into liquidation, it is very difficult and costly to reverse.

Investigating the financial health of your business

An approach from a debt collector should also prompt you to look at the health of your business, as it can be an indicator that things are not travelling as well as they should be. The main complaint amongst insolvency practitioners continues to be that if the business owner had sought professional advice earlier, there would have been a greater chance of turning the business around.

As a business owner, the first thing you should do to investigate the financial health of your business is visit your accountant. Providing your financial books are up to date, your accountant should be able to give you a snapshot of how your business is faring. They can also refer you to other professionals if it appears that you need legal assistance or restructuring advice.

Six signs that your business could be in trouble

The main indicators that your business may be in trouble are:

  • Inability to meet employee superannuation contributions
  • Significantly aged creditors, beyond 120 days
  • A general lack of liquidity or available cash
  • Significant and recurring losses
  • Inability to meet taxation obligations
  • Receipt of letters of demand, statutory demands or court summons

On a practical level, if you are tempted to use your BAS obligations as if they represent a loan, your business is likely to be in trouble.

Directors can be personally liable for debts incurred during insolvent trading

It is important to note that not all of these indicators need to be present to cause you to investigate the financial health of your business. In fact, if all of these indicators are present, it would indicate that the business is trading whilst insolvent.

Engaging in insolvent trading can have very significant impacts for a director of a company. If a company engages in insolvent trading and is later placed into liquidation, the director can be held personally liable for all debts incurred whilst the company traded insolvently. In addition, a director can be held liable for unpaid PAYG and superannuation guarantee payments.