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Debt and finance disputes on the rise: How your business can balance its litigation risk

15 March 2023

3 min read

#Dispute Resolution & Litigation, #Corporate Restructuring and Insolvency

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Debt and finance disputes on the rise: How your business can balance its litigation risk

Since the start of 2023, we have seen an uptick in the number of new matters and inquiries regarding debts, insolvency, enforcement of securities and distressed assets due to increased pressure on the financial position of the counterparties. 

Many of those matters arise from a combination of increasing interest rates, ATO enforcement action and general uncertainty in the markets. Disruption in the supply of goods and services, inability to meet terms of trade, long outstanding debt, increased insolvency risk and uncertainty in the securities markets are all impacting the positioning between counterparties.

This appears to be affecting organisations both big and small, but of course larger organisations are more likely to have the resources and leverage to withstand the headwinds. 

There are a number of practical measures that organisations can take in these circumstances, regardless of whether they fall on the potential plaintiff or potential defendant side of things. 

For creditors:

  • review your terms and conditions (T&Cs) of trade – are they in writing and clear in the requirements, particularly around key obligations such as what goods or services are being supplied, the terms of payment, terms of credit, interest and enforceability
  • consider what security you have in place, including mortgages, PPSR registered security interests and director guarantees. There are strict rules around drafting, execution and registration which must be complied with
  • review and prioritise your outstanding debtors and get on the phone early – delay is the enemy of collectability. Understand where your profit lies and prioritise it. Consider making deals to maintain cashflows. While litigation is an option, alternative dispute resolution processes such as negotiation and mediation should be considered early
  • obtain advice about what steps can be taken to recover debts, including letters of demand, statutory demands under the Corporations Act (which were largely dormant during COVID, but are now coming out of the woodwork), enforcement of securities and commencing court proceedings if required
  • if a customer or client is insolvent, again take some advice about what options may be available or how best to deal with the insolvency practitioner. For example, we are seeing more steps being taken by liquidators to review and take action on voidable transactions such as unfair preferences, uncommercial transactions and unreasonable director-related transactions.

For debtors and guarantors:

  • take advice about rights and obligations under the relevant contracts and security agreements which relate to the claim. There are often unexpected arguments which arise around enforceability
  • engage in early discussions with suppliers around the terms of trade, time for payment and extension of time. Leaving things lingering will likely exacerbate the issues and reduce the chances of an early resolution
  • if the ability to pay debts or claimed amounts is a concern, take some early advice about the organisation’s solvency position and potential options to deal with it. Early engagement and an independent business review may reveal solutions and other available options, such as the safe harbour protections for directors which were introduced in 2017 amendments to the Corporations Act.

This list is, of course, not exhaustive and each case will be different. The main point is that it is best to engage with these types of commercial issues at an early opportunity to minimise the potential impact for your organisation.

If you have any questions about this article or how you can balance the litigation risks for your business, please contact a member of our Dispute Resolution & Litigation team below.

The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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