- An insolvency lawyer is a legal professional who specialises in dealing with the Corporations Act 2001 (Cth) and its insolvency provisions.
- 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 won’t be broken by a subpoena.
- Insolvency lawyers need to be more comfortable than other lawyers with quickly evolving situations and conflicting dynamics. As a result of this, it is very important that you do your research as a director or stakeholder to pick an insolvency lawyer that suits you and your situation.
What is the problem that insolvency lawyers solve?
Key problems in insolvency:
- Dealing with creditors
- Restructuring businesses
- Protecting confidentiality
The key problem in insolvency is dealing with assets when all the creditors and stakeholders can’t be paid in full. An insolvency lawyer’s role is to work out what the best outcome for their clients can be.
The fundamental difference between lawyers and accountants (including tax agents) is that lawyers have the job of acting as intermediaries while also ensuring the efficacy of any restructure that alters the rights of stakeholders.
The main problem that insolvency lawyers deal with is the protection of their client’s rights and the boundaries of the law. Lawyers don’t calculate tax or work out the optimal financing arrangement in place. The role is broader, and, providing that the law isn’t broken and that there are no ethical conflicts, the protection of client rights is paramount.
So who cares? The issue to recognise for company directors is that accountants, financiers, brokers, consultants and other advisers can’t offer the same confidentiality, integrity and duties of fidelity that solicitors can.
To learn more about insolvency:
- Read our Whitepaper: What you need to know before you pre-pack (to avoid phoenix activity)
- Listen to our podcast: Podcast on safe harbour from insolvent trading
- Read our blog post: What are the success rates of voluntary administration?
- Read our blog post: 7 things that SME directors need to be aware of when they hit rocky times
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 as and when they become due and payable (section 95A of the Corporations Act 2001 (Cth)).
Insolvency is determined by the judicial application of the cash-flow test. This test assesses the ability of a company to pay its debts (or sell its assets fast enough to pay its debts), i.e. whether the company is suffering from a temporary lack of liquidity (solvent), or a chronic shortage of working capital (insolvent).
While there is no relevant statutory definition of a debt that is due and payable, case law has provided some clarity. For insolvency purposes, debts are limited to all claims that are provable in the winding up (Bank of Australasia v Hall) and claims for immediately ascertainable liquidated amounts (Box Valley Pty Ltd v Kidd & Anor).
For more information on insolvency and the law, read our blog post: What is the legal meaning of insolvency?
What is ‘true professionalism’ when it comes to an insolvency lawyer?
When engaging an insolvency lawyer, you want to ensure that they are a true professional. Unfortunately, not all insolvency lawyers will be. True professionals will have the following characteristics:
- Trusted advisor: Do others trust this insolvency lawyer to advise them? Do you have faith in their abilities and feel like they are putting your interests first?
- Knowledge based on learning experience: It is important to do your research before engaging an insolvency lawyer. What are their areas of expertise? How many years of experience do they have?
- Ethical standing: What are the values and practices of your insolvency lawyer? What is their reputation in the legal and business community? Will they help you secure a result that is conscionable and proper?
What key skills does an insolvency lawyer need?
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 direction and assistance 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 the Corporations Act
On top of litigation, the lawyer should have excellent technical knowledge of the Corporations Act. It is essential that they have an in-depth knowledge of insolvency-related law so that quick advice can be given in complex situations. You don’t want a lawyer who is always consulting 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. This is our advice because while the Corporations Act may appear to set out a clear answer to a legal question, that doesn’t mean that anybody will actually take action to enforce that law in practice. 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 sleeves 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 complement their strategy.
The Sewell & Kettle team have all the experience necessary to handle insolvency matters for our clients. Read about our experience here.
The main benefit of insolvency lawyers
The problem with engaging an accountant is that records of your discussions, advice provided to you, and their 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 under section 588G of the Corporations Act. Conversations and advice received from a lawyer (i.e. solicitor or barrister) are subject to legal professional privilege, meaning that your lawyer cannot be compelled to share information about communications or preparatory work done in relation to their engagement as your lawyer.
The 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, 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 are the alternatives 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), and their work and communications aren’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, do your research, 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?
If you’re considering engaging a particular insolvency lawyer, ask yourself the following questions first:
1. Are you the first director they have worked for?
Ask for references from other directors that they have helped through an insolvency issue so that you can speak to their clients. If they can’t point you to a happy former client, there is a problem. Ideally, they will be able to point to multiple, recent clients, so you can be sure that they are currently and consistently performing their job well. 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, and how you can expect the matter to generally unfold.
2. Are they a 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. However, you don’t want to engage 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 although they might be book smart, they won’t show courage or leadership when it comes to advocating for you. 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 that will make a difference.
3. Do you like their associates?
Ask them who they work with or give referrals to, because they will be likely to be close to certain insolvency practitioners, accountants, finance brokers and other consultants. In the situation that an informal workout isn’t a success, they’ll probably 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, and if this is to occur, you want to ensure that you are comfortable with the people you will potentially be working with.
4. Do you feel comfortable working with them?
You’ll need to work together very closely, 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 at your first meeting with up-front, direct questions about their professional character rather take a passive stance, in order to make sure that you are engaging someone who you can have a productive lawyer-client relationship with.
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. You should always do your own cost/benefit analysis of this alternative while you assess the feasibility of a turnaround. If you put the company into liquidation however, you may still need a lawyer to represent you. 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.
Sewell & Kettle Lawyers are ready to help you with your insolvency concerns. With significant experience and a specialised focus on debt recovery and insolvency, we are uniquely placed to help you face your commercial challenges. Read more about our legal and insolvency services, and then contact us.
Keep reading to get more information!
- Watch our interview: Interview on the safe harbour from insolvent trading
- Read our blog post: Help, my company is insolvent! Who should I call?
- Read our blog post: When shouldn’t you appoint a voluntary administrator?
- Read our blog post: How do you pick the right voluntary administrator?
- Read our blog post: How do you choose the right liquidator?
- Read our blog post: What are the shortcomings of voluntary administration? La La Land meets Suicide Squad