Debt Recovery – Charging Clauses & Guarantees

If you are a business that offers credit to customers, it is vital that you have clauses in your credit agreement or contract that you are able to rely on in the event of a default. This could drastically improve your chances of recovering your debt.

Charging Clauses

One example is a charging clause. A charging clause requires your customer (the debtor) to secure its debt to you by allowing you to “charge” his or property to the value of any unpaid debt. That is, the debtor’s property is used as security for the debt you are owed.

If your credit agreement includes a valid charging clause, this entitles you to lodge a caveat over property if the debtor fails to make payment in accordance with your terms. The caveat prevents the debtor from selling or further encumbering the property whilst the caveat is in place. This means that you can take legal action to recover the debt, safe in the knowledge that the debtor is prevented from selling or disposing of his or her assets.

Personal Guarantee

Another way to improve your prospects of recovering money is to require the directors of your corporate clients to provide you with a personal guarantee. This involves the director agreeing to take on personal liability for the debt that’s owed to you, in the event his company fails to make payment. Some creditors insist a personal guarantee, especially in circumstances where the corporate customer does not have substantial assets or a substantial trading history.

Both Options

There is no reason why your credit terms can’t include both a charging clause and the requirement for directors to provide a personal guarantee. In fact, the director’s personal guarantee can also include a charging clause!

Having a charge over property dramatically increases your prospects of recovering an unsecured debt. If your customer declares bankruptcy or insolvency, your chances of recovering payment will be far greater than those of an unsecured creditor. In fact in a lot of cases, a charge over land that’s secured by a caveat is only second in line behind the mortgage held by the bank. That’s a far better position to be in than an unsecured creditor!!

What is a Typical Scenario?

A typical scenario might look something like this:

  1. Your customer asks you to set up a new account. That is, they want you to provide goods or services on credit and issue an invoice at the end of the month.
  2. You send your customer a copy of your credit application and your terms and conditions. The terms and conditions contain a charging clause in your favour. If the customer is a company, you also send them a “director’s personal guarantee” which also contains a charging clause.
  3. Once the credit agreement and the personal guarantee has been signed and returned to you, you commence providing goods and services to your customer on credit.
  4. If the customer fails to pay, you issue a letter of demand requesting payment;
  5. If the customer still fails to make payment, a caveat is lodged over the customer’s property. If the director has signed a personal guarantee, then a caveat is also lodged over the director’s property. You are now a “secured creditor”.

Under Queensland law, once a caveat has been lodged over property, you have three months to enforce the caveat. Once you have taken steps to enforce the caveat (by way of legal proceedings), the caveat remains in place and cannot be removed from the title until you agree to remove it or the court orders it to be removed.

Therefore, from the time you lodge the caveat, you have up to 3 months to arrange payment from your customer. If payment is made during that period, the caveat is removed and the matter is at an end. If the debt is not paid, you may commence legal proceedings at any time during that 3 month period. You can then pursue the debt, safe in the knowledge that the debtor can’t sell the property to avoid paying you.

A creditor with a correctly lodged caveat is in a strong negotiating position. In general, creditors who have taken security over property have far greater prospects of recovering payment than those who provide goods and services on credit without any form of security.

This area of law is very complex and failure to adhere to strict legal requirements and timeframes may result in serious consequences. If you would like us to review your credit agreements and advise whether they protect your interests, contact one of our expert litigation lawyers today.


Please note that this publication is not intended to be legal advice that is specific to your circumstances.  This is general advice that’s intended to provide an illustration of how the law may operate to assist you to recover payment of monies owed by a debtor.