“There was much made of the lack of formal insolvency during the pandemic,” he remarked, “in large part because of government stimulus and the temporary change to the insolvent trading laws during that time”.

“Over the course of Q3 and Q4 last year, however, we saw a number of the ‘zombie’ companies, particularly at the SME level, enter into liquidation and this, in turn, put pressure on other businesses,” he observed. 

“This was not surprising as many of the companies that failed were surviving on government intervention alone.”

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Last year, Australia was generally ring-fenced from global issues, although there was increased uncertainty in the market towards the end of last year, which was created by interest rate rises, an inability to raise capital as easily through the public market, impacts of the war in the Ukraine, ongoing supply chain issues and general volatility, Mr Edwards explained.

As a result of this volatility, many businesses were more circumspect about performance, and a more conservative approach was taken at a board and shareholder level, Mr Edwards illuminated. 

What areas saw insolvency?

There was insolvency activity in the construction space and associated sectors, with ongoing supply chain issues, contractual terms (fixed price) and delays, he said.

“The contagion impact, especially in the construction space, was a very live issue for many businesses and continues now,” stated Mr Edwards. 

Towards the end of last year, and slipping into this year, there was distress in the crypto space — with some significant players failing both in Australia and abroad, explained Mr Edwards; in many instances, this was a result of fraud and poor governance. 

Delays in closing transactions

“The other thing that was interesting was the delay in closing transactions experienced on both the M&A and financing side, with investors becoming more critical of forecasts and the underlying values sought. 

“This did not necessarily mean the transaction did not close, but there was less of the frenetic activity we had seen in previous years. 

“The potential delays can also put more pressure on boards and businesses [that] were experiencing liquidity constraints, and this, in turn, can change the dynamic of a sale or refinance, or indeed push a business into formal insolvency,” Mr Edwards explained.

Lessons for 2023?

“The primary lesson of the last couple of years remains the same,” Mr Edwards told Lawyers Weekly. “Companies and boards who are proactive in identifying and addressing a business’ financial problems are far more likely to overcome distress and come out the other side.

“This does not necessarily mean they will avoid formal insolvency, but boards who engage and seek appropriate guidance from their advisors can achieve a restructure with the support of stakeholders.”

Mr Edwards shared a key lesson for restructuring and insolvency lawyers: “Bring solutions to the table — don’t be an idle or reactive participant.” 

“Boards and clients are relying on us for our legal advice and commercial acumen,” he said. “Many have not been through a distress scenario before (at least on [the] company side) and are very reliant on the skills, experience and level head we can bring to a situation. 

“Suggest solutions, make introductions and, where appropriate, act as a devil’s advocate to the thinking of the board.”

How will the insolvency space look if a recession comes to pass?

“I am quietly confident it will be busier than it has been in years and will be an area of practice with interesting, complex and novel matters — something that should be very appealing to the junior ranks!” Mr Edwards stated. 

“I am actually not sure a recession is on the cards, in Australia at least,” he mused. “But I do think increasing financial pressures, uncertainty around interest rates, ongoing global volatility, more discerning investors (both debt and equity) and a lack of government intervention will mean that the number of insolvencies will certainly resort back to pre-COVID numbers (if not higher).”

2023 should see a number of busy practice areas, there will be more distress and formal insolvency, but there will also be ongoing activity in the debt and financing space, and private equity transactions will continue (although the multiples sought will not be as high, he noted. 

A lot of Australian businesses have come out of the past couple of years, so there will be opportunities to grow or sell, he continued.

There is a lot of money to deploy amongst non-bank lenders and private equity, with many investors waiting for the right time to invest — the money needs to find a home eventually as pressure from investors comes to bear, he noted. 

“All of these factors in my mind point to an interesting year, with lots of opportunity,” he added.