A primer for directors
The benefit of a good insolvency lawyer is true professionalism. Thoughtful advice from an insolvency lawyer should save directors a lot of financial pain and wasted effort if their company faces insolvency. Discussions are privileged and lawyers owe a duty of fidelity to the client that can’t be broken by a subpoena. Insolvency lawyers need to be more comfortable than other lawyers with fast changing situations and conflicting dynamics.
What is insolvency law?
Insolvency law is the body of legal knowledge about what duties and consequences arise when a company is unable to pay its debts.
Key skill 1: Litigation experience
Company liquidations, voluntary administrations and receiverships give rise to a lot of litigation. Directors and creditors can be sued under claw-back actions and insolvency practitioners look to the Courts for directions and to assist with investigations (through examinations and production of documents). Most of the work that insolvency lawyers do is to represent litigants. It is essential that your insolvency lawyer has excellent litigation experience to be able to act as an effective advocate in Court. You don’t want a lawyer who is always waiting for an email from a barrister to answer your questions.
Key skill 2: Technical knowledge of Corporations Act
On top of litigation the lawyer should have excellent technical knowledge of the Corporations Act. It is essential to have excellent knowledge of insolvency-related law so that quick advice can be given in complex situations. You don’t want a lawyer who is checking their bulky Corporations Act to answer simple questions. Also, a good working knowledge of the Personal Properties Securities Act is very helpful.
Key skill 3: Insolvency industry experience
You can read a text book on insolvency law but ultimately still have no idea how the insolvency industry actually works. You should only engage an insolvency lawyer with at least 10 years of insolvency industry experience. The take-away is that just because the Corporations Act sets out an answer to a legal question doesn’t mean that anybody may actually take up the cudgel to enforce that law. The best example of this is the widespread non-enforcement of insolvent trading laws by liquidators.
Key skill 4: Practical turnaround experience
Most insolvency practitioners and lawyers have no real experience turning around companies. They spend their time running litigation and preparing insolvency documents and reports. It is usually more profitable for insolvency practitioners to take on a formal appointment (i.e. voluntary administration or liquidation) rather than roll up their sleaves and work on the day-to-day of a turnaround. This is usually the first objective of directors and so it is important that their lawyer can also complement their strategy.
Key benefit compared to accountants: Legal professional privilege
The main problem with engaging an accountant is that all of the records of discussions, advice and working documents may be obtained by a liquidator who is subsequently appointed. If the insolvent company is liquidated and before that time the directors worked hard to try and turn it around they may face an insolvent trading allegation. Conversations and advice received from a lawyer (i.e. solicitor or barrister) are subject to legal professional privilege.
Key downsides of insolvency lawyers
- Charging: Hourly rates apply and they often require funds up front, can’t charge contingency fees (% of outcome)
- Entrepreneurialism: Insolvency lawyers are unlikely to have entrepreneurial flair, if they did have entrepreneurial flair they would probably be doing something else rather than being insolvency lawyers
- Working with others: They generally run their own show in silos and so they may not be the best at working with others
- A little intransigent: It’s a tough business being an insolvency lawyer so insolvency law tends to attract the more intransigent lawyers because it helps to stick to your guns
What is the alternative to an insolvency lawyer?
- Your private practice accountant: Likely to have a good relationship with the directors but be lacking in key skills 1-4 set out above.
- An insolvency practitioner: They would prefer a formal appointment (i.e. voluntary administration or liquidation), their work isn’t protected by protected by privilege but they would be on top of key skills 2 and 3 set out above.
- A consultant: It depends on their skills and experience about whether they can help so you should look for indicators of a wealth of professional knowledge before engaging them. They would be likely to charge contingency fees (% of turnover being the most popular methodology) for the services.
- A phoenix operator: Likely to suggest an illegal option (i.e. a brown paper bag being delivered regularly and ultimately very unhappy employees and creditors). Their experience may be based on a failed attempt to be an insolvency practitioner.
- Yourself: If you can’t afford professional advice you may need to be your own adviser. So use common sense and focus on the financials! Make sure you file tax returns so you don’t get a lock-down director penalty notice from the ATO.
How can you make sure that you’re picking the right insolvency lawyer?
1. You’re not the first director they have worked for
Ask for references to other directors they have helped so that you can speak to their last clients. If they can’t point you to a happy former client there is a problem. It also helps just to talk to someone who has been through the insolvency process as a director/owner of a company to help demystify what you may face in an insolvency scenario.
2. Are they a true professional and thought leader?
They’ll need to have degrees and have written articles and other materials to be a true professional. Demonstrated knowledge of the technical aspects of the Corporations Act and litigation strategy is essential. On the other hand, are they the awkward lawyer who receives referrals from other commercial lawyers in their firm but ultimately doesn’t have their own relationships sufficient to sustain a practice? That type of person may become frustrating to deal with because they won’t show courage or leadership. They may be fine to run a debt recovery claim or write you a memorandum regarding the Corporations Act but they’ll be unable to give you meaningful strategic or tactical guidance.
3. You mightn’t like their associates
Ask them who they work with or refer to because they will be likely to be close to certain insolvency practitioners, accountants, finance brokers and other consultants. If an informal workout isn’t a success they’ll be likely to refer you to one of the insolvency practitioners that they are friendly with. They should be able to point you to different insolvency firms (small, medium and large) that may take an appointment as voluntary administrator or liquidator if a turnaround is not feasible.
4. Do you feel comfortable working with them?
You’ll need to work together intensely so personal chemistry is important. You could be placed in high pressure situations and you’ll need to trust their advice without having the time to get a second opinion. Lawyers that specialise in commercial litigation are notoriously difficult characters because it comes with the territory of rough and tumble litigation. It’s better to test them with direct questions upfront about their professional character rather take a passive stance at your first meeting.
5. Is it worth investing in saving the business?
There is always the “walk away” option for business owners and directors. This would involve stopping the fight and putting the company into liquidation. Do your own cost/benefit analysis of this alternative while you assess the feasibility of a turnaround. If you put the company into liquidation you may still need a lawyer to represent you though. If you are hoping that a voluntary administration will solve your problems then you should do your homework with an accountant, insolvency practitioner and insolvency lawyer before you commence that process.