“Anyone who gives you a definitive answer is just crystal ball gazing,” argued Blackwattle Legal partner Trevor Withane.

“The number of insolvency appointments are down compared to a pre-COVID year. In the 18-19 financial year, there were 8,105 formal insolvency appointments. In the 19-20 financial year, there were 7,362 formal insolvency appointments. In contrast, in the 20-21 financial year, there were only 4,235 formal insolvency appointments.

“As every insolvency lawyer and accountant knows, government business support, rent deferrals, ATO payment plans and their reticence to enforce, booming property prices and leniency from creditors have propped up the economy and staved off the tsunami of insolvencies that was predicted at the start of the pandemic.”

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Insolvency lawyers, Maddocks partner Danielle Funston added, have learnt to expect the unpredictable.

“The ‘avalanche’ of work expected to come from COVID-19 was long awaited and instead we saw formal insolvencies at their lowest as a result of government subsidies and moratoriums on insolvent trading provisions,” she pointed out.

The “elephant in the room”, however, is when the Australian Taxation Office and Nominal Insurer will resume enforcement actions, Mr Withane said.

“The Tax Office has always been a major driver in the insolvency space, and in recent times, they have severely curtailed their enforcement activity. There is, as at the last federal budget, about $36 billion in uncollected taxes built up across the country. Many commentators believe that any significant enforcement action by the ATO will take place only after the next federal election,” he said.

“Assuming there is a federal election early to mid-next year, and the ATO (as they have foreshadowed) start taking more aggressive enforcement positions, on one view, we should see an uptick in insolvency appointments by September 2022.”

According to KordaMentha partner Kate Conneely, the M&A boom will continue well into 2022, but with “clear pockets” of stress and distress across the economy.

“Cash flows are being squeezed (and it’s not just the smaller players) and payment terms are being stretched as far as possible, talent is tight and it’s going to cost a lot to recruit, inflation/price rises are on their way, and supply chain headaches aren’t going away anytime soon,” she detailed.

Hamilton Locke partner Nick Edwards agreed: “I think there are more factors that should logically dictate an increase in activity.

“I also think the goodwill associated with everyone combating COVID-19 together will eventually wane, and creditors will begin to demand outstanding amounts with increasingly aggressive action. In saying all of this, I don’t see it happening immediately, and I suspect we will only start to see the uptick in the second quarter of next year. There is still plenty of capital options available and distressed businesses are still managing to find alternative ways forward.”

Overall, Ms Conneely said, there “is likely to be an uptick but there is also a fundamental change in the market such that formal insolvency work isn’t going to return to pre-pandemic levels and a change in focus/skill sets is probably needed”.

If one also factors in law reform to support restructuring, she added, there will most certainly be more work to do.

Such extra work, McCullough Robertson partner David O'Farrell posits, may not happen until the second half of the year, however. 

"In the current business environment of low interest rates and inactive ATO, there is little impetus for insolvency and restructuring work. That will continue until such time as normal economic conditions return which seemingly won’t be before mid-2022," he says. 

How lawyers in this space can prepare

Insolvency and restructuring lawyers should, Mr Withane suggested, be preparing for this uptick now.

“We have seen a number of insolvency accounting firms increase headcount in preparation. There is an argument that law firms who are underweight in this area should be doing the same thing,” he said.

His firm has been encouraging clients to undertake regular financial health checks with their accountants, he said, following which quick and pragmatic presentations of legal options should be facilitated.

Such proactivity, he deduced, “can act like an early warning system which can be essential for the long-term survival of a business”.

Preparedness is necessary, Mr O'Farrell surmises, regardless of whether predictions come to fruition: "The predicted surge or tsunami of insolvency work did not emerge in 2021, and we are none the wiser as to if and when it may emerge. That said, at some stage the ATO will commence enforcement, and economic conditions will return to some form of normal."

Lawyers, Mr Edwards said, must also grasp what clients of a variety of sectors and industries are predicting for the coming year.

“Engaging now with corporate clients to get a real-time understanding of how those businesses are performing and to understand the pressure points going forward [is important]. For those businesses who are uncertain or concerned about the next few months perhaps safe harbour should be considered right now to provide some protection over the Christmas and new year period,” he listed.

“With respect to creditor clients, on the other hand, it would be useful for lawyers to have a conversation to understand their drivers for the next six to 12 months (repayment dates, fund constraints, pressure points and any other plans they have). Being in a position to understand what the beginning of 2022 may hold will place people in good stead to manage client expectations and also deliver the best restructuring outcomes.”

Ms Funston supported this, noting that whether one is advising a board of directors or trading on a business through a formal insolvency process, the “best way to prepare is to truly understand how the business operates”.

“[Know] where the pressure points are and know what’s coming down the line. Be proactive in looking at what hurdles are coming and be proactive in looking at the market and focussing and learning about those industries that are expected to encounter hurdles in 2022,” she advised.

Perhaps even more importantly, Mr Edwards argued, is the need for lawyers in this space to ensure they are well-rested.

“The last two years have put a significant strain on everyone – uncertainty of movement and restrictions, health concerns and just general stress. Many people haven’t been away or seen loved ones. So, in my mind, the best thing people can do is afford their staff a decent break,” he proclaimed.

Challenges

Such preparedness will be paramount, given the array of hurdles that may face lawyers in this space.

Being "battle-ready", Mr O'Farrell warns, will be necessary in the event of a "dramatic upswing" in work. 

"The paradox is that although work-streams are at historical lows, there is high demand for junior and mid-level insolvency and restructuring lawyers. That co-hort is also in high demand internationally so the challenge is likely to be further exacerbated when borders truly re-open," he notes.

"At the technical level, it is a challenge for insolvency lawyers to stay ahead of the ever-present and increasingly piece-meal legislative reform – that challenge may ease by a potential ‘root and branch’ review of insolvency law."

For Mr Withane, navigating uncertainty will be front of mind. The insolvency and restructuring lawyers who have made it through the last few years, he said, would “almost certainly” prefer an environment that returns to a normalised level or perhaps higher levels of formal insolvency appointments. 

The challenge, he proclaimed, is likely to be in the waiting.

“If the predicted tsunami of COVID-19 insolvencies does not eventuate, insolvency lawyers might need to consider how they could pivot their business. For example, insolvency lawyers who work the back-end might need to consider a more general commercial litigation practice,” he said.

Mr Edwards feels that the availability of alternate sources of capital will be burdensome for lawyers in this space.

“As is well documented, the COVID-19 pandemic and associated restrictions was a health crisis, not a capital crunch,” he posited.

“There remain many viable options for companies to refinance their existing debt – albeit in some instances those options are more aggressive and more inclined to enforce. This access to capital is one of the key reasons we have not seen as many formal insolvencies as new funds in particular look to deploy capital.

“I fear, however, in an increasing number of instances the desire to deploy capital may mean structural issues and past sins within the borrower’s business are overlooked, and it is these issues which will inevitably lead to potential insolvencies.” 

Elsewhere, both Ms Funston and Ms Conneely believe that a looming loss of talent – both to in-house and overseas roles – will be consequential.

“A number of lawyers have left practice in R&I over the last two years. Our profession is really quite small and tight knit. Post-GFC, a number of commercial or litigation lawyers rebranded as insolvency lawyers – but it’s really not that simple or easy,” Ms Conneely outlined.

“The area that we practice in is highly specialised and there have been significant regulatory and legislative changes that lawyers need to be across. There’s a whole of experience and strategy that we draw from too.”

Opportunities

As the age of coronavirus (hopefully) draws to a close, Mr Edwards said, there will be many businesses across Australia that realise that they should have used the last two years to restructure.

“In saying that, the opportunity still exists and lawyers can help guide businesses through these processes and help provide solutions,” he advised.

“Formal insolvency processes, such as administration and deeds of company arrangement, should not be seen as a concession of defeat or a finality, but rather they can be used as a way to restructure and recapitalise companies to ensure viability.”

Insolvency lawyers on both the front and back ends, Mr Withane listed, will have a lot do to.

Those on the front-end, he said, can “expect to see a number of restructuring deals, deeds of forbearance and the like, while those at the back-end are “waiting to help with the clean-up”.

“There are likely to be good opportunities to act for creditors (both secured and unsecured) in enforcing their debts. There will be opportunities to act for directors who may be facing actions, or for the liquidators who are bringing them, for insolvent trading and voidable transactions,” he explained.

Ultimately, practising in the area of R&I, Ms Funston submitted, is “never dull”. 2022, she said, will see interesting and complex matters, which will require “significant strategy and thinking”.

This, she said, is “really the best part of practising in this space”.

Mr O'Farrell backs this, highlighting that there ought be significant long-term opportunity for developing insolvency lawyers who "stay the course".

"More immediately, I expect there will be increasing activity, in early 2022, in debtor and non-mainstream creditor work as those sectors either manage their pre-COVID exposures or position for post-COVID opportunities," he says. 

Further reflections

What the market must remember, Mr Edwards mused, is that insolvency is a critical cog in the machine that is Australia’s business ecosystem.

When done properly, he said, it provides for the redistribution of capital and resources from underperforming businesses to performing ones.

“As Frank Borman remarked in the early 80s – and I am paraphrasing – capitalism without insolvency is like Catholicism without hell. It is a necessary process and without it the system isn’t working,” he noted.

“People mistakenly assume low numbers of insolvencies is a good thing – those low numbers, however, don’t represent good businesses who have dodged insolvency, but rather bad businesses stagnating and who in theory should be allowed to fail.”