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Insolvency and restructuring appointments on the rise
Insolvencies leapt in July as Australian businesses struggled to cope with economic conditions. Lawyers Weekly spoke with two restructuring and insolvency practitioners to understand what lawyers can expect in this space and how they can best advise clients.
Jess Feyder
Through 2022, businesses have struggled with a volatile market characterised by supply chain issues, declining consumer confidence, rising interest rates, inflation, labour shortages and a rise in ATO activity.
In 2021, restructuring and insolvency lawyers predicted a rise in appointments, following a pre-COVID low. According to the latest figures from CreditorWatch, insolvencies are predicted to hit even higher levels for the rest of the year.
Lawyers Weekly spoke with restructuring and insolvency partner Nicholas Edwards from BigLaw firm Hamilton Locke about the increased volume of insolvency work being seen.
The post-pandemic increases in insolvency can be largely attributable to increased ATO collection activity and, in particular, the issuance of director penalty notices (DPNs), noted Mr Edwards.
The spike in insolvencies has been seen primarily at the SME level and has involved liquidation in most cases, he said.
David Low, special counsel at Madison Marcus, noted that activity and inquiries in the insolvency area had risen notably in the construction industry sector.
“Builders and developers face difficult conditions due to low margins, increased building costs and an increasing interest rate environment,” said Mr Low.
Not just large businesses, but many smaller builders and developers are facing insolvency, he said.
Mr Low noted a particular challenge facing lawyers advising small businesses, “small business owners may be reluctant to initiate an insolvency process,” he warned, “however, this may mean that creditors end up controlling the process and timing of enforcement action instead of the business owner”.
They may later face claims of insolvency trading, if the company ultimately goes into liquidation, said Mr Low. Insolvency lawyers could best advise these clients by encouraging them to act early and looking at the business on a holistic basis — regarding overall assets, cash flow and liability.
“For restructuring and insolvency lawyers, there is scope for the number of formal appointments to increase above 2019 levels as many of the zombie companies and underperforming businesses that survived on government support alone over the last 24 months are flushed out of the market,” said Mr Edwards.
Mr Edwards discussed how lawyers could support businesses through potential insolvency or restructuring.
Lawyers are subject to having potentially “hard” conversations with clients about the underlying enterprise value and what they may need to do to protect the business, said Mr Edwards.
“Having a firm understanding of all options available under the Australian insolvency regime and providing clear, succinct and commercial advice is key, especially when dealing with a board who has never experienced business distress,” advised Mr Edwards.
“The best way to advise clients right now is to proactively engage with them — talk to them and try to understand the problems or potential problems their businesses are likely to experience.
“Understand the market they exist in and what they are trying to achieve.
“Once the potential problems are known, guide them on their engagement with key stakeholders like secured lenders or the ATO.
“The other thing restructuring and insolvency lawyers can do is ensure that businesses, especially boards, know all options available to them.”
“Bring solutions to the table,” said Mr Edwards. “Be it introductions to the emerging private debt market, novel solutions or a restructure plan that may involve formal insolvency, but if done in a controlled fashion, will see the business survive.
“Within uncertainty, there is opportunity.
“Many clients are actively looking to acquire businesses or lend more money into the market, and restructuring lawyers are well placed to advise on the acquisition structure or the case of debt, the ideal security structure, and the availability of potential equity upside such as warrants that may be available.”
