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What simpler legal question could there be than: “What is a debt”? You don’t need to be a lawyer to answer that one, right? Everyone knows that a debt is where someone owes someone else money.


In a general sense, that’s true, but you’d be surprised to learn how many people, lawyers and non-lawyers alike, seem to have difficulty understanding what exactly it means to owe someone money. Often people tend to view all present and future obligations to pay money as debts, which may be true most of the time, but it is not always true. For example, someone may have an obligation to pay you money to compensate you for a loss that they have caused you to suffer or to reverse the effect of a transaction which, for some reason, the law regards as unjust. The obligation to pay the money may be “accrued” because the person who owes the money (called the “debtor”) has:


a) Signed a contract that creates an immediate obligation to pay, either at a certain time, or because you have performed a certain obligation; or


b) Admitted to owing you the money; or


c) Been found liable to pay you the money by a Court or arbitrator


Alternatively, the obligation may not arise until you do something you are obliged to do (a “contingent” obligation), or a binding order is made by a Court or tribunal to pay the money, or the debtor admits in writing that the debt is owed to you.


You should never simply assume that an invoice, or a demand, or a simple documentary record of a transaction, proves legally that you owe that money as a debt. Sometimes this area of law is quite technical. If in doubt, make sure you get good legal advice before you pay or make admissions or promises to pay.



One common example is those letters of demand that insurance companies often send, or get their debt collectors to send, to drivers who admit liability for damage occasioned to the insured driver’s property as a result of a car accident. Insurers often assume that because the party at fault has admitted to being liable to pay some amount in compensation for the damage, this alone will entitle the insurer to demand immediate payment of the amount that they say is owing. With all due respect to insurance companies, this is wrong. What if the liable party says: “Yes, the accident was my fault, or partly my fault, but I made contact with the front part of the other driver’s vehicle so you can’t charge me for damage sustained to the rear”; or: “Yes I made contact with the other vehicle, but you’re charging me for mechanical repairs whereas I only caused a minor dent, or damaged the paintwork”? In other words, what if the liable party admits they were at fault but denies that their actions caused the damage that the insurer wants them to pay?


In such cases, the insurer has no right to demand that the driver at fault pay them any amount because:


a) the party at fault has only admitted that they owe some amount but not the amount the insurer demands; b) the party at fault has not assumed an obligation to pay the amount claimed (or any amount at all) by signing a contract or other legal document which is capable of creating binding legal obligations; and c) the insurance company has not proven any obligation, or indebtedness to pay the amount claimed to the satisfaction of a court or other decision-maker authorised to determine such obligations in a legally binding way.     

The above example involves one party (the insurer) making a demand on another party to pay an amount that is not yet owed (and may never be owed). It is possible that such a demand may amount to misleading conduct in trade or commerce, infringing the Australian Consumer Law. If a party is misled by the demand into believing they in fact owed the precise amount demanded and on the basis of that belief paid the amount, they may have the right to recover the payment in Court.


This is general information only, and does not constitute specific legal advice. Murray Thornhill is the Director at HHG Legal Group with the Litigation/Commercial Law team. Daniel Morris is an Associate with the Litigation/Commercial Law team at HHG Legal Group. If you would like further details in relation to this information, please contact HHG Legal Group on 1800 609 945.


*The information provided in this website serves as a general guide and does not constitute legal advice. It is based on our research and experience at the time of publication. Please consult our knowledgeable legal team for any specific inquiries or advice relevant to your circumstances, as the content may not have been updated subsequently.