by: Josh Taylor, Partner | Callum Martin, Senior Associate
21 May 2025
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Those owed money under a contract or because of a civil wrong are often quick to pursue the debtor for their loss. They may take their case to Court and obtain a judgment which confirms a debtor must pay. However, a successful creditor may not automatically receive the money owed, as the debtor might be insolvent or simply refuse to pay. It is important before taking any action against a debtor to consider the debtor’s ability to pay a judgment. However, if the debtor can pay but won’t, a successful creditor has several options at their disposal.
Before pursuing the amount formally, it is almost always advisable to approach the debtor. It is inexpensive and the debtor may pay when the creditor makes clear they do not intend to relent.
If the debtor involved is a company and there is no question that it owes the debt, a creditor’s first port-of-call will be a statutory demand. This imposes an obligation on a debtor company to either pay the amount owing, reach a compromise with the creditor or apply to the High Court to set the demand aside within a set period of time.
If the company fails to respond within the timeframe, the creditor might apply to liquidate the debtor company in reliance on the demand. This makes the statutory demand a powerful motivator – a company’s board of directors will generally wish to avoid the risk of liquidation.
The statutory demand process sets in motion a strict and very consequential process for the debtor company. It is important a creditor has good grounds to issue the demand – it may only be issued where the debt:
Typically, a debt will not be in dispute where the Court has made an order requiring the debtor to pay a sum of money. Nonetheless, a statutory demand is a significant step and you should seek legal advice before issuing the demand.
Assuming a debtor company has failed to comply with a statutory demand, the creditor may wish to liquidate the debtor company. This will result in a liquidator’s appointment, who will take in the unsecured assets of the debtor company and deal with them (often by selling them) to maximise returns to all the company’s unsecured creditors. Once liquidated, the company will cease to trade and its debts are discharged: no further claim can be made against it.
By the time liquidation is contemplated, a debtor company may have more than one unsecured creditor and few assets. Not uncommonly, a debtor company will owe substantial sums to the Inland Revenue. As such, a creditor may receive only a small portion (if anything) in a liquidation – although they may receive the full amount. This is a choice a creditor has to make.
A company is a separate legal entity from those who work for it, own it or direct it. In most cases, a company’s debt cannot be recovered personally from its directors, shareholders or employees. There are a few nuanced exceptions and we can provide legal advice about these to ensure you best understand your options as a creditor.
Similar to a liquidation, a creditor may apply to adjudicate a natural person (a human being, not a company) bankrupt where that person is unable to pay their debts. This involves an application to the High Court for a bankruptcy notice, stipulating the person owes an amount greater than $1,000. The creditor will then serve that notice on the debtor and, if the debtor does not dispute or pay the amount stated within the required timeframe, a creditor may apply to the High Court for that person’s bankruptcy.
If bankrupted, the Official Assignee will take control of the bankrupt’s finances and assets and attempt to repay the bankrupt’s creditors. The same considerations about the prospect of recovery apply in bankruptcy as in liquidation. Once bankrupt, all of that person’s debts are typically extinguished and the bankrupt cannot be pursued for them.
Liquidation and bankruptcy are often considered options of last resort, given the risk of diminished or non-payment. It may be sensible to instead reach a deal with the debtor: the creditor might agree not to apply for the debtor’s liquidation or bankruptcy if the debtor pays the creditor the amount owed (or a portion of it). This can be a good strategy for getting paid, but it does carry some risk.
If the debtor is later liquidated/bankrupted by the debtor’s own action or by another creditor, a liquidator/the Official Assignee will inspect the debtor’s previous transactions over a defined period. If the debtor paid one of its creditors while insolvent, that payment might be voided where it had the effect of preferring one creditor over another. In that case, a creditor might find themselves having to return the money they received.
Courts have several ways to either make the debtor pay or to make others pay on their behalf. These will be more-or-less effective depending on the situation and we are happy to discuss which of these options will work for you.
The first way to recover a debt from someone is to determine whether the debtor has some asset or income stream coming from a third party, and to divert that stream (or a portion of it) to the creditor. In this regard the Court can make attachment orders which require an employer or other person to deduct a regular amount from a debtor’s income; or a garnishee order, directing someone who owes money to the debtor to pay that money to the creditor instead. Unless the debtor is owed a very large amount of money, these are generally best for the payment of smaller debts.
Next, the Court has the jurisdiction to make orders in respect of a debtor’s property. If the debtor owns a house, car or other valuable tangible property, the Court may make a sale order in respect of that property, forcing the property to go to auction and the proceeds delivered to the creditor. The sale order can also be used to force the transfer of money in a debtor’s bank account to the creditor. The Court can also register a charging order against the title of any property, preventing it from being sold without paying the debt. This can be a strong motivator: a charging order against the title of a house or other real estate is often a preliminary step before applying to sell that property. A debtor will generally prefer to pay their debt over seeing their house sold.
Where it is unclear what assets a debtor holds, the Court has mechanisms for compelling debtors to attend Court and give evidence of their financial position. The creditor can cross-examine the debtor on their estimation of their assets and further independent evidence might be presented.
In many cases, it is simply unavoidable that a creditor will need to pursue unpaid debts. However, the most effective way to collect a debt is to avoid the need to collect it in the first place. A business owner can structure their dealings in such a way that the risk of unpaid debts is reduced, or such that repayment is easily obtained. This can include:
1. Doing due diligence into prospective clients to confirm:
2. Updating a business’ terms of trade to state that:
3. Obtaining security over a client’s property as part of the business transaction. This might be a mortgage over real estate, or a charge over plant and equipment.
4. Insisting that the shareholders or directors of corporate clients provide personal guarantees in respect of any amounts they may incur under the contract.
Wynn Williams has an exceptional corporate and business advisory team which can help you to put these safeguards in place; while our litigation team is uniquely placed to assist you in the unfortunate event it becomes necessary to pursue a debtor for unpaid money. These matters are often complex; please come sit down with us to discuss your situation and let us work out a strategy which is right for you.
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