Debt recovery is often approached as a reactive process, something to deal with once payment has already failed. In reality, effective debt recovery is a strategic continuum that begins at contract formation, intensifies at the first sign of default, and culminates in decisive legal enforcement where required.
This article sets out how businesses should think about debt recovery in South Africa: how to structure transactions to avoid bad debts, how to choose the right enforcement mechanism, and what costs and timeframes can realistically be expected.
Phase One: Structuring for Recovery Before the Debt Exists
The strongest debt recovery position is created before any goods are delivered or services rendered.
Every credit relationship should be underpinned by a properly drafted contractual framework, whether in the form of a bespoke agreement or enforceable standard trading terms. These documents must be more than administrative formalities—they should clearly regulate payment terms, default consequences, interest, cost recovery, and enforcement mechanisms.
Before extending credit, prudent creditors conduct creditworthiness and asset checks. These assessments assist in determining whether the counterparty is a viable trading entity or merely a corporate shell with limited recovery prospects.
Where exposure is material, creditors should also consider security mechanisms, such as personal suretyships, guarantees, cessions, or other recognised forms of credit enhancement. The presence (or absence) of security often determines whether recovery is commercially viable once default occurs.
Phase Two: Understanding Who Is Legally Liable
A common misconception in debt recovery is that directors or shareholders are automatically responsible for company debts. South African law draws a clear distinction between a company and the individuals behind it.
As a rule, only the company is liable for its contractual obligations. Personal liability arises only in exceptional circumstances, such as fraud or reckless trading, where it can be shown that directors continued to incur debt while the company was already insolvent. These claims are complex, evidence-heavy, and uncertain.
For this reason, recovery strategies should generally be focused on the debtor entity itself—unless personal liability has been contractually secured upfront or clear misconduct can be proven.
Phase Three: Choosing the Right Enforcement Path
Once a debt is due and unpaid, the creditor must decide how to apply pressure effectively. South African law provides two primary enforcement routes, each suited to different commercial realities.
Action Proceedings: Enforcing Payment Through the Courts
Action proceedings are the traditional litigation route and typically begin with a formal letter of demand. This document sets out the contractual basis for the debt, the amount outstanding, and provides a short period for payment.
If payment is not made, a summons is issued in the appropriate court. Where the claim is undefended, a default judgment can be obtained relatively quickly. If the debtor defends the matter without a genuine legal basis, a summary judgment application may be pursued to avoid protracted litigation.
Only where a bona fide defence exists does the matter proceed to trial—an outcome that is generally slow and commercially inefficient for standard debt recovery.
Once judgment is obtained, enforcement proceeds through execution, including attachment and sale of the debtor’s assets. Where no assets are found, the creditor may consider insolvency proceedings.
Commercial reality: Action proceedings are most effective where the debtor has assets to attach or wishes to avoid an adverse judgment.
Application Proceedings: Liquidation as Leverage
Where the debtor is a company, liquidation proceedings often provide a more powerful enforcement mechanism.
This process begins with a statutory demand in terms of section 345 of the Companies Act (read with applicable provisions of the old Act). If the debt remains unpaid after 21 days, the company is deemed to be unable to pay its debts, allowing the creditor to apply for liquidation.
The threat of liquidation is often sufficient to force payment—particularly where the debtor is a trading entity with regulatory licences, contracts, or goodwill at risk.
However, liquidation is a blunt instrument. A final winding-up brings the company’s business to an end, and creditors are ranked according to statutory preference. Unsecured creditors frequently recover little or nothing.
Commercial reality: Liquidation is most effective as leverage, not as a value-maximising recovery tool.
Phase Four: Cost, Time, and Commercial Trade-Offs
Legal debt recovery is not cost-neutral. While successful creditors may recover a portion of their legal costs from the debtor, this recovery is limited by outdated court tariffs.
Costs are taxed by a Taxing Master, who determines what portion of legal fees is recoverable. In practice, a successful litigant can expect to recover between a range of approximately 50%-100% of actual legal spend.
This makes early strategy critical. In many cases, decisive early action leads to faster settlement and materially lower costs.
A Strategic Approach to Debt Recovery
At O’Reilly Law, we approach debt recovery as a commercial exercise, not a procedural one. Our focus is on:
-
assessing recovery prospects upfront;
-
selecting the most effective enforcement mechanism;
-
applying pressure proportionate to the debtor’s risk profile; and
-
avoiding unnecessary legal spend where commercial leverage will suffice.
Whether advising on pre-credit structuring, enforcing payment through the courts, or using insolvency strategically, our objective is simple: maximise recovery while minimising time and cost.
Speak to O’Reilly Law
If your business is dealing with unpaid debts, or if you would like to strengthen your contracts and credit controls to reduce future exposure, we can help.
📩 Email: info@oreillylaw.co.za
📞 Tel: +27 (0)82 929 7015
🌐 Web: www.oreillylaw.co.za
Contact O’Reilly Law for clear, strategic advice on debt recovery and commercial enforcement.