Australia collection profile

Relevant financial information on domestic companies is difficult to obtain for several reasons. Firstly, the vast majority of companies in Australia are privately held, and financial reporting obligations are defined by the Australian Securities and Investment Commission (ASIC). Companies which are obliged to file financial reports are generally limited to:
-    Publicly listed companies  
-    Large proprietary companies (subject to tests on company size, notwithstanding historic “grandfathering” exemptions for older businesses)
-    Disclosing entities (charitable organizations, managed investment funds, foreign domiciled branches)
-    Other companies where ASIC has invoked its discretion to direct the company to file accounts.

As a result, while all companies are obliged to keep adequate financial records, less than 5% of Australian companies publish or publicly file annual or semi-annual accounts. 

Secondly, privately held organizations may elect to operate under “trust” structures, which are not legal entities in their own right but serve the primary purpose of asset protection for the beneficiaries to the trust. A side effect for creditors, is that such structures can limit visibility and accountability. The vast majority of Australian SME companies, are not required to lodge financial statements publicly, may cite confidentiality reasons to creditors.  Our team of Allianz Trade credit analysts are highly skilled in obtaining such information, though direct approaches to Buyers. Our team will allocate each company a grade reflecting its financial health and how it conducts business, in tandem with a streamlined automated data feed from local Mercantile / credit reporting bureaus.

Grades represent a core of our knowledge and analyses, which serve primarily to help clients identify and avoid significant risk. Data is continuously monitored in real time, to offer the most up-to-date information to support management decisions for our customers.

Liability for business debts is determined by legal structures, which are described as follows:

• Proprietorship (“Sole Trader”) is commonly relied upon for small scale operations since it is based on the personal qualities of the sole proprietor who owns the business assets. As a result, the proprietor is fully liable for the business’ activities and debts.
• Partnerships allow up to 20 partners to conduct business together. The partners establish their liabilities and rights in a specific ‘partnership agreement’ but do not create a separate legal entity. Unless a Limited Partnership is set up, the partners’ liability is joint and unlimited, even if one partner generates business debts without the other partners’ knowledge or consent.
• Proprietary Limited (“Pty Ltd”) Companies are very popular structures which may be set up by one to fifty shareholders. There is no minimum capital requirement, and the shareholders are liable on their contribution. Companies provide another formalized legal structure in which the shares are tradable and risk is limited to capital contributions.
• Foreign businesses may also operate in Australia through a Representative Office (which cannot generate income) or through a Branch (which is independent and entitled to conduct business activities). Such companies are generally obliged to lodge a balance sheet to ASIC on a yearly basis, with some exemptions available for small companies.
• Trusts are particular structures in which operations are regulated by an agreement (deed) and in which a trustee (i) holds the assets of the trust and (ii) operates the business for the benefit of beneficiaries. Trusts can be complex structures which are often aimed at minimizing taxation liabilities, succession planning, or asset protection. A trustee can be a person, or more commonly in business arrangements, a company (corporate trustee)
  Common Trust forms include: Discretionary trading trusts (profit distribution at the discretion of the trustee) and Unit Trusts (fixed distribution according to units held by beneficiaries).
• Joint Ventures differ from partnerships insofar as the parties (whether individual or corporate entities) regroup their resources and skills in order to develop a common project and generate a common income without necessarily incorporating a separate entity.

The court system in Australia can be complex since the country is divided into two internal territories (the Northern Territory and the Australian Capital Territory) and six sovereign states with reserve powers.  Each has its own legal system and laws, which sometimes adds complexity despite ongoing harmonization efforts taking place. There are no specific tribunals for commercial matters, but there are certain specialized divisions within existing courts (i.e. Small Claims Division of NSW local court, Victorian Civil Administrative Tribunal, etc.). Therefore, depending on the quantum of the claim and the cause of action, large commercial disputes are usually brought to the Federal Court of Australia (the FCA sits in all capital cities) or to the Supreme Court in one or another territory.

As a general rule, though, Local Courts or Magistrates Courts (names may vary from one state to another) are capable to decide on lower value claims. For international trade, it is of importance to agree the jurisdiction of resolution within contracts for supply. If no jurisdiction is specified, judgments may need to be executed first in the country of the Supplier, and enforced through the Australian superior courts, under the Foreign Judgements Act 1991. 

A summary table is provided as a guide only:

Collection costs are usually not chargeable to the debtor unless the contract outlines precisely which costs may be considered. Often, the costs are not recuperated as the parties prefer settling claims amicably, but they nonetheless constitute efficient negotiation tools.

Retention of Title (RoT) contractual provisions (also known as Romalpa clauses) ensure that a buyer shall only acquire ownership of goods once payment has been received in full.

These arrangements may be triggered during and outside of insolvency proceedings alike, but there is an increasingly significant formalism attached to these clauses, which must therefore be considered with the greatest care. In particular, the Personal Property Security Act 2009 (Cth) (PPSA) which came into force in January 2012 has created a strict obligation for suppliers of goods to register their security interests (such as ROT) for the security to become effective.

Indeed, only the RoT arrangements registered with the Personal Property Security Register protect the supplier’s property (called a ‘purchase money security interest,’ or PMSI) by giving the creditor ‘super priority’ over other creditors’ debts. Super priority, in addition, requires that registration is completed before the goods are delivered (PPSA s.62), and only applies for goods which have remained unpaid for.

The most common payment methods are as follows:

The majority of transactions in Australia are done on open account, which means that the goods are shipped and delivered before payment is due. EFT electronic funds transfer and swift bank transfers are otherwise among the most popular payment means worldwide as they are fast, secured, and supported by an increasingly developed banking network domestically and internationally. For export transactions, transfers may be insured by an Export Credit Insurance policy, which helps minimize the risk of sudden or unexpected customer insolvency. Allianz Trade’ worldwide network of risk offices monitors the financial well-being of customers and grants them a specific credit limit up to which clients may trade and claim should something go wrong.

Alternatively, Standby Letters of Credit (a bank guarantees the debtor’s credit quality and repayment abilities) constitute reliable guarantees which can be interpreted as a sign of good faith since they can be triggered as a ‘payment of last resort’ if the client fails to fulfil a contractual commitment. Also, Confirmed Documentary Letters of Credit (a debtor guarantees that a certain amount of money is made available to a beneficiary through a bank once certain terms specifically agreed by the parties have been met) may be considered as it can be obtained easily from local banks (may be costly).

Cheques are used minimally in Australia, except perhaps by smaller enterprises, such as sole traders. Generally speaking, bank guarantees can be obtained fairly rapidly even though they may be expensive depending on the issuing institution.

Amicable settlement opportunities should always be seen as the most efficient alternative to formal litigation proceedings since Australian law does not provide for fast track legal proceedings. In practice, the Australian authorities have set up various pre-legal action mechanisms (under the Civil Dispute Resolution Act of 2011) to encourage the parties to negotiate and settle commercial disputes prior to commencing a court trial.

Before starting legal proceedings against a debtor, assessment of assets is important as it allows verification as to whether the company is still active and whether recovery chances are at best. In addition, it is essential to be aware of the debtor’s solvency status: if insolvency proceedings have been initiated, it indeed becomes impossible to enforce a debt (see below). For undisputed debt above AUD 2,000 (approx. EUR 1,270), creditors may alternatively send the debtor a request (Statutory Demand) to pay within 21 days and threaten to file a petition for liquidation if the time limit is not respected (under section 459E of the Corporations Act 2001).

If the amicable phase fails, or if the debtor questions the claim, the option of starting legal proceedings remains, although it tends to be lengthy and costly when the claim is defended.

Ordinary proceedings would typically take place as follows: although there is no mandatory obligation to request payment in writing before taking legal action, a Demand Letter recalling the principal and interest due is advisable. In order to commence formal proceedings, a Statement of Claim must be served to the debtor, who must then abide by the decision or file a defence within 28 days (delays may be granted depending on geographical factors). Failure of the debtor to comply with the rules entitles the creditor to apply for a default judgment. Otherwise, the court would organize hearings and define a timeline for the proceedings (discovery phase allowing lawyers to question the parties, mediation phase).

Remedies ordered by the court may take the form of compensatory damages, specific performance orders, restrictive injunctions or restitution orders. Punitive damages are available in tort cases but remain unheard of in debt litigation proceedings.

It is also worth adding that commencing the lawsuit before the competent court in the debtor’s place of registration usually helps prevent procedural delays due to lack of jurisdiction arguments. Class Action (lawsuit involving a group) proceedings are also increasingly common in Australia.

Copies of unpaid invoices, last statement of account, copy of supply contract, copy of credit application, proof of delivery if necessary (Airway Bill or Bills of Lading for export).

Debt-related claims must be brought to court within six years, starting from the original due date. Beyond this time limitation, legal action will not be granted although certain factors (formally acknowledging debts, for instance) may in certain circumstances interrupt the prescribed period. In the Northern Territory, the prescribed period is reduced to three years.

Precautionary measures in the form of preliminary injunctions may be awarded to preserve the status quo pending a final and enforceable judgment. Mandatory and Prohibitory injunctions would respectively compel or prevent a party to do something, but although they are common in Intellectual Property or Trade Practices cases, they remain rare in debt litigation.

Each requires that the applicant demonstrates, among other points, that mere damages would be insufficient to compensate potential losses in the absence of an injunction. Search orders (Anton Pillar orders), issued if critical evidence is likely to be concealed or destroyed by the defendant, are extremely rarely awarded. Stay orders prevent a party from commencing or continuing proceedings on a temporary basis, while anti-suit injunctions restrain a party from commencing or continuing proceedings in a foreign jurisdiction. Alternatively, interim attachment orders (also known as freezing orders) help preserve assets which ought to be used to satisfy a final judgment but which are at risk of being dissipated in order to frustrate enforcement.

Application is made ex parte (i.e. without the debtor being present), therefore the creditor must disclose all relevant facts supporting the request.
It is important to note, however, that a freezing order does not create any preferential right in favour of the claimant over the seized assets should the legal action lead to liquidation proceedings. In addition, if the creditor is defeated, they may be liable for the loss and damage suffered by the debtor as a result of the freezing order. Courts may therefore order creditors to provide security on costs in order to protect debtors from irresponsible action.

Appeal is usually available when a judgment is tainted by an error of law or fact though procedures may vary from one court to another.

Appeals against judgments rendered in first instance by Federal Courts are reviewed internally by a Full Court (three judges). Appeals against judgments rendered in first instance by the States’ Supreme Courts, by contrast, are reviewed 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 a Full Court of the Supreme Court).
Finally, decisions rendered in second instance by Appellate jurisdictions may be brought to the High Court (usually competent on constitutional matters) provided that special leave has been granted.

The time limits for bringing an appeal differ from one jurisdiction to another, but leave for appeal can usually be requested within 45 days to three months following the notification of the decision to the parties. Overall, this court structure tends to make appeal procedures complex and expensive.

A judgment is enforceable as soon as it becomes final (i.e. when appeals are not available anymore). The judgment creditor has up to twelve years to seek enforcement of a local judgment through Examination Notices, Garnishee Orders or Writs of Execution.

Examination Orders are useful tools as they may force the debtor to provide information on their financial situation and assets, and thus help us choose a recovery strategy. The Order must be requested from the court after judgment has been entered.

The court may also issue a Garnishee Order allowing the creditor to recover its debt directly from the debtor’s bank account (or salary) as well as from the debtor’s debtors, until the principal and interest are paid off. In practice, however, the procedure is best used after examining the books and records of the company in court (Examination Order).

The court may finally grant a Writ of Execution for the Levy of Property, which orders a sheriff to seize and sell the debtors’ property to the benefit of the creditor. The sheriff’s costs include fixed fees (less than AUD 100, i.e. approx. EUR 64) as well as a percentage on the proceeds. The sheriff’s intervention often pushes the debtor to achieve an arrangement (instalments) to avoid seizure, but the debtor might alternatively prefer to file an application to set the judgment aside. Such costs are usually added to the debtor’s payable debt.

Debts may also be recovered through insolvency proceedings. A certificate of judgment may indeed be annexed to a Creditors Statutory Demand or bankruptcy notice requiring the debtor to pay secure or compound the debt within 21 days. Failure to do so would constitute prima facie proof of insolvency and would give grounds to a winding up or bankruptcy application.

Straightforward claims would normally be settled within two to four months, but disputed claims may last 9 months to a year. Enforcement proceedings, in addition, could take six to nine months where the debtor’s assets are difficult to identify.

International litigation will always take longer and cost more than domestic litigation – the difference would depend on numerous factors which could only be meaningfully quantified on a case by case basis.

Procedural costs may differ from one state’s legislation to another, but the courts enjoy broad discretion in ordering costs.

As a general rule, the unsuccessful party is requested to pay the reasonable legal costs of the successful party, but in practice, approximately 60% to 70% of the costs are effectively charged to them, unless the courts calculate costs so as to grant indemnity to the winning party (which may then recover 100% of its costs).

Efforts (whether positive or negative) made during the pre-legal amicable negotiations are usually taken into consideration when awarding costs.
As previously mentioned, the law does not authorize adding automatic collection costs and interest unless the matter has been agreed contractually. However, the law allows the creditor to add a fixed amount to the claim while filing its case with a court, in order to recuperate legal fees upon obtaining an enforceable final decision. In practice, costs are usually left aside as paying the debt is what matters most. Court fees are regulated and ‘scale costs’ are set by each state or territory government. These are published on the relevant court website.

Having a lawyer may constitute a good way to minimize procedural costs. Conditional arrangements whereby attorneys are not paid upfront but rather receive a fixed sum upon success (i.e. ‘no-win-no- fee’) are common in various litigation proceedings, but not in relation to debt recovery cases. Contingent fees whereby the legal professionals are entitled to receiving a percentage on the final award may be prohibited by law depending on the jurisdiction. This prohibition does not normally apply to litigation-funding companies.

ADR mechanisms are popular in Australia but remain unused in debt litigation thus far. Nonetheless and as previously noted, the parties have an obligation to negotiate in order to settle their dispute prior to bringing formal legal action. In addition, mediation and arbitration may be relied upon by the parties on a voluntary basis, or upon court invitation aiming at solving commercial disputes through informal procedures.

In mediation proceedings, a mediator is appointed (by the parties or by a court) to help the parties reach an acceptable compromise, but it has no authority to decide for the parties. Any agreement between the parties and validated by the mediator is binding.

In arbitration proceedings, by contrast, the arbitrator is appointed by the parties and given authority to solve the dispute on their behalf. Therefore, the arbitral award is final, binding, and enforceable through domestic courts. Arbitration standards for international disputes coincide with the 2006 version of the UNCITRAL Model Law on International Commercial Arbitration. Arbitrators may grant interim relief.

As a result of the difficulty to obtain timely decisions from domestic courts when the claim is disputed, a foreign forum (i.e. under a foreign law or before a foreign court) may in theory be considered. Indeed, Australian courts usually respect foreign jurisdiction provisions as agreed by the parties to a contract unless public policy reasons prevent from applying the law of the chosen forum (or if, as in relation to consumer protection matters, the legislator has imposed the exclusive application of Australian law).

It is essential, however, 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 jurisdiction clause is drafted to this effect.

Enforcing foreign awards in Australia may be a time-consuming exercise and using domestic courts may sometimes remain faster than obtaining an award abroad and enforcing it through an exequatur procedure. Currently, the enforcement of foreign judgments in Australia is governed by both statutory regimes (the Foreign Judgments Act 1991 and the Foreign Judgments Regulations 1992) and Common Law principles. Foreign awards must first be registered officially with an Australian Court and be recognized as a domestic and enforceable judgment (exequatur proceedings).

The foreign award must be a final and conclusive money judgment. Of course, the award must be enforceable in the country of the issuing court but it must have remained unenforced.

Furthermore, recognition normally depends on whether a reciprocal recognition and enforcement agreement exists between Australia and the issuing country. Therefore, unless the issuing country is listed in the 1992 Regulations, judgment from its courts will not be enforceable in Australia.

Australia is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. Therefore, domestic courts also ought to recognize and enforce decisions rendered through international arbitration proceedings.

Insolvency in Australia is merely a cash flow matter and Section 95A of the Corporations Act 2001 (Cth) states that a company remains solvent if (and only if) the company is able to pay all its debts when they become due.
Insolvency proceedings are expensive and complex, so are usually used as a last resort. However, the National Personal Insolvency Index (a public register in electronic format) provides a list of insolvent companies.
Therefore, the threat of initiating insolvency proceedings (through a statutory demand letter) may constitute an effective means of pressure while collecting unpaid debt. In practice, insolvency proceedings tend to follow a final judgment or result from the debtor’s failure to comply with a statutory demand within 21 days (in which case proceedings occur before the Federal Court). Section 459P of the Corporations Act provides for different proceedings.

The Corporate Insolvency Reforms Act 2020 (commenced on 1 January 2021) reformed the procedures, including:

• A new Debt Restructuring Process for small businesses;
• A new Simplified Liquidation Process for small businesses.
  

Informal out-of-court settlements may be concluded by a debtor with all creditors but creditors would need to agree and execute a deed so that a single creditor could not overturn such an arrangement. Unlike a Deed of Company Arrangement (DoCA) agreement after a formal insolvency administration, the creditors would have no protection against unfair preference claims by any later liquidator.

A court-sanctioned Scheme of Arrangement between creditors and the company may also be reached. It becomes effective once a required majority of creditors (at least 50% in number and 75% in value of creditors in each class) has approved the scheme and the court has validated the agreement. Those creditors that did not vote in favour of the arrangement are nonetheless bound, which may have significant consequences considering that the law provides no limitation as to how much of the debt is susceptible to being written-off.

The process is designed to allow companies to restructure their debts. Directors remain in control of the business and are able to continue trading. Creditors can’t initiate legal action (including windup) during the restructuring period. Once a plan is approved all unsecured creditors and some secured creditors of the company are bound by the plan.

A company is eligible to enter the restructuring process if the total liabilities of the company on the day that restructuring begins does not exceed AUD 1 million (approx. EUR 635,000). The board of the eligible company must also have resolved that it has reasonable grounds for suspecting current, or a likelihood of future, insolvency.

An eligible company will be 'under restructuring' while its restructuring plan is being developed in consultation with the Small Business Restructuring Practitioners (SBRP). The restructuring plan ends when one of the following occurs:
•    The obligations under the plan have been fulfilled, and all admissible debts or claims have been dealt with in accordance with the plan;
•    If the Court orders termination of a restructuring plan;
•    if a contravention of the plan by a person bound by the plan has not been rectified within 30 business days, then the next business day after the end of that period; or the day an administrator, liquidator or provisional liquidator of the company is appointed and the company enters liquidation or a voluntary administration process.

A receiver is nominated upon enforcement of a general security agreement (debenture) and takes over the company management and security assets until the debt is repaid or recovered. If the process fails, a liquidation procedure may be initiated.

The receiver only realises assets for the benefit of the secured party such as a bank who appointed the receiver. This period only represents a different creditor to reduce unpaid debt through recovery of security stock through ROT.

Administration Voluntary Administration is the most common procedure as it aims to maximize a company’s chances to continue its activities. The procedure suspends the director’s control in favour of a registered administrator (appointed by the company itself).

Creditors and other parties are generally prevented from enforcing their rights during the moratorium phase, but it is very common for commercial contracts to allow a party to terminate the contract if the other undergoes some insolvency procedures. DoCA may eventually formalize an agreed compromise which then binds all unsecured creditors, including those that did not vote in favour. If a DOCA is not accepted the company will go into liquidation.

Liquidation may be requested by the parties or following administration and leads to nominating a liquidator in charge of controlling the company, keeping the creditors informed, and distributing any assets. The company is then deregistered.

Once appointed, the liquidator must contact potential creditors and communicate a claim submission date (through newspapers for instance). The liquidator may then admit or reject a claim, and would often ask for further evidence justifying the creditor’s right.

The Small Business Liquidation process intends to allow faster and lower cost liquidations as simpler alternative to existing liquidation processes. This process is intended to free up value for creditors and employees, and allow assets to be quickly reallocated elsewhere in the economy, supporting productivity and growth.

The simplified liquidation process retains the general framework of the existing creditors voluntary liquidation process, with modifications to reduce time and cost. Where a liquidator believes on reasonable grounds that a company meets the eligibility criteria, the liquidator is able to adopt the simplified Small Business Liquidation process instead of the general process. Certain provisions of the Insolvency Practice Rules do not apply such that creditors meetings are not held in a Small Business Liquidation. Instead, liquidators provide information to creditors electronically and proposals are put by giving notice to creditors for the purposes of electronic voting.

Priority rules normally apply while distributing the proceeds to the creditors. Secured creditors holding a security interest (as defined in Section 12 of the Personal Property Securities Act 2009) are given priority against unsecured creditors in liquidation proceedings.

Expenses flowing from the insolvency proceedings, for instance, constitute priority debts. Employees are a special class of creditors which has a degree of priority over secured and unsecured creditors. Tax debts are considered unsecured and would only be paid for if sufficient funds remain.

The petitioning creditor’s legal costs (related to the insolvency proceedings) may be considered a priority and refunded to the creditor prior to sharing dividends.

In addition, the liquidator may cancel various types of transactions concluded during ‘suspect periods’ prior to the proceedings. For instance, transactions aiming at avoiding creditors within ten years prior to the proceedings, unreasonable decisions taken by the directors within four years prior to the proceedings, transactions favouring one creditor over the others (unfair preferences) concluded within six months prior to the proceedings, unfair loans, fraudulent transactions etc. would be considered problematic. Incriminated transactions would then be void and the creditor would be requested to refund the amounts at stake (a claim would be lodged against the creditor).

It is difficult to provide timeframes for reorganization-based proceedings; however, liquidation tends to be effective and fairly quick (from six to 18 months on average).

Copies of unpaid invoices, last statement of account, copy of supply contract, copy of credit application, proof of delivery if necessary (Airway Bills or Bills of Lading for export).