Debt Recovery NSW: Letter of Demand, Statutory Demand, Court

Debt recovery in NSW is a common problem for small and medium businesses. When a customer does not pay an invoice, cash flow suffers quickly. The process usually moves through three stages: a letter of demand, then a statutory demand (if the debtor is a company), then court proceedings. This article explains each stage in general terms so you know what is involved before you act.

Before you start: check the basics

Good records make recovery faster and cheaper. Before sending any demand, gather the contract or quote, purchase orders, invoices, proof of delivery or completion, statements of account and any emails in which the debtor acknowledged the debt. Confirm exactly who owes you the money. If your contract was with a company, that company is the debtor, not its directors, unless a director signed a personal guarantee. Searching ASIC and the Australian Business Register can confirm the correct legal name.

Also check whether the debt is disputed, because a genuine dispute can derail a statutory demand.

Time limits for recovering a debt in NSW

Under the Limitation Act 1969 (NSW), the general limitation period for an unsecured debt is six years from the date the debt became due. In NSW, when the period expires, the creditor's right can be extinguished altogether, not just the ability to sue. A payment or a signed written acknowledgement of the debt by the debtor can restart the period. Do not wait: evidence goes stale and debtors can become insolvent.

Step 1: Letter of demand

A letter of demand is the usual first step. There is no single prescribed form, but an effective letter normally:

• identifies the creditor and debtor by their correct legal names;
• states the amount owing and how it is calculated, with invoice numbers and dates;
• refers to the contract or terms that give rise to the debt, including any right to interest or recovery costs;
• sets a clear deadline for payment, commonly 7 or 14 days;
• explains that court proceedings may follow if payment is not made; and
• is sent in a way you can prove, such as by email and post.

Keep the tone factual and avoid threats you do not intend to carry out. Many debts are paid or a payment plan is agreed at this stage, and any arrangement should be recorded in writing.

Step 2: Statutory demand (companies only)

If the debtor is a company, a statutory demand under section 459E of the Corporations Act 2001 (Cth) can be a powerful tool. It does not apply to individuals or sole traders, who are dealt with under the bankruptcy regime instead. Key features include:

• Minimum amount: the debt must be at least the statutory minimum, which is currently $4,000.
• Form and affidavit: the demand must be in the prescribed form (Form 509H) and, unless it is based on a court judgment or order, accompanied by an affidavit verifying the debt.
• 21 days to comply: the company has 21 days after service to pay, secure or compound the debt to your reasonable satisfaction.
• 21 days to challenge: the company must apply to the court to set the demand aside within 21 days of service. Courts have been reluctant to extend this time.
• Presumption of insolvency: if the company does not comply, section 459C(2) means it is presumed to be insolvent, which can support an application to wind it up.

A demand can be set aside where there is a genuine dispute about the debt, an offsetting claim or a defect causing substantial injustice. Using a statutory demand for a disputed debt is risky and can lead to a costs order, and errors in the form, affidavit or service can invalidate it. It is the first step towards winding up and suits debts that are clearly owed.

Step 3: Going to court

If the debtor ignores your letter, you may start civil proceedings. In NSW, the Local Court hears claims up to $100,000. Its Small Claims Division hears claims up to $20,000 in a less formal way, where the rules of evidence do not apply, and the General Division hears claims above $20,000 up to $100,000. Larger claims go to the District Court or the Supreme Court. The right court depends on the amount, the complexity and whether there is a dispute about the facts.

After you file a statement of claim, the debtor can pay, defend or do nothing. If they do not respond in time, you may be able to obtain default judgment. If they defend, the court may list the matter for a pre-trial review, mediation or hearing, and many civil matters settle before a hearing through written terms of settlement or consent orders.

Enforcing a judgment

A judgment is not payment. If the debtor still does not pay, you may need to enforce it, for example through orders to obtain information about the debtor's assets, garnishee orders against money owed to the debtor, or orders to seize property. The best method depends on what assets the debtor holds.

Frequently Asked Questions

How long do I have to recover a business debt in NSW?

For most unsecured debts the general period is six years from when the debt became due under the Limitation Act 1969 (NSW). Different rules can apply to secured debts and deeds, so check your situation early.

Do I need to send a letter of demand before going to court?

There is no universal legal requirement, but it is standard practice. It gives the debtor a chance to pay, creates a record of the claim and can be relevant to costs and interest.

What is the minimum debt for a statutory demand?

The statutory minimum is currently $4,000. Statutory demands can only be served on companies, not on individuals or sole traders.

Can I claim interest and legal costs on an unpaid invoice?

That depends on your contract and the court's powers. If your terms of trade provide for interest and recovery costs, say so in your demand. Courts have discretion over costs, and you may not recover all of what you spend.

This article is general information only and is not legal advice. Laws and processes change, and every situation is different. Speak to a lawyer about your circumstances before you act.