The issue of collecting old debts is often placed in the ‘too hard’ basket by collection agencies, with less than a quarter of collection agencies surveyed by ASIC indicating that they actively pursue statute-barred debts1. Particularly, in regards to the recent case law, clarification of the issues surrounding statute-barred debts can assist creditors and collection agents in their decisions whether or not to pursue old debts.
The limitations period for recovery of debts emerges from state, rather than national legislation, which gives rise to different limitation periods for debts under simple contracts as well as those pursuant to a Court Judgement. Most jurisdictions in Australia provide a standard period of 6 years for the recovery of debts under simple contract, while providing a longer period of around 12 years for debts pursuant to a Court Judgement.
The limitation period starts from the date on which the right of action accrued which in plain English generally means the date of default. This can refer to the date which a contract requires payment or in the case of a missed instalment, the date that relevant instalment became due and payable.
The limitation period can restart once the creditor takes court action to recover the debt. It can also be re-started if the debtor either makes a payment to satisfy the debt or acknowledges the debt in writing. Such a declaration must constitute a “clear acknowledgement that the debt exists and is unpaid.” In NSW, NT and the ACT, once the initial limitation period has expired, it cannot be restarted by the above actions, however in all other Australia jurisdictions, statute-barred debts can be restarted at any time, even if the initial limitation period has expired.
Given the differences between the various limitations statutes within Australia, it is important to correctly identify the appropriate legislation for a particular debt. In this regard, the general rule is that the place of residence of the debtor when the contract was entered into, however in some cases it can be the jurisdiction; in which the contract was entered into. Therefore, the primary statute of concern is the Limitations Act 1969 (NSW) which is the relevant legislation for NSW.
As shown in the Victorian Case of Collection House v Taylor, there can be serious consequences for creditors and collection agencies that fail to note the relevance of statute-barred debts. In this case, the collection agency failed to inform the debtor that their debt was statute-barred and received a payment in part-satisfaction of the outstanding debt. The debtor later took the collection agency to court which found that the collection agency had acted ‘unconscionably’ by failing to disclose that the debt was statute-barred and they were required to return the payment to the debtor. Although this was a Victorian Case, the NSW Court of Appeal has made a similar ruling suggesting that unconscionable conduct may be made in situations involving statute-barred debts.
The issue of statute barred debts also has applications in a winding up. Under s553 of the Corporations Act 2001, statute barred debts are not admissible against a company in Liquidation. However, a debt can be proved in the winding up if it was not statute-barred at the time of the winding up order, even though it became statute barred before the proof of debt was lodged1.
1. “Collecting Statute-Barred Debts”, An ASIC Report September 2005
2. Motor Terms Company Pty Limited v Liberty Insurance Limited (in liq)(1967) 116 CLR 177 at 190.