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How the rise in insolvencies is impacting lawyers’ fees
Here, a senior associate explains how the increased volume of companies going into liquidation and/or insolvency across various industries poses significant financial risks for various legal service providers.
Grace Robbie
Speaking on a recent episode of The Boutique Lawyer Show, Cristian Urdea, a senior associate for Melbourne-based law firm MA Legal, highlighted the significant impact of the increasing occurrences of liquidation of legal service providers. He also underscored the need for legal service providers to be aware of the substantial risks associated with this rise and to respond accordingly.
“ASIC released their stats at the end of [the] financial year [and] what that showed is that across the board [and] across all industries, there’s been an increase,” he said.
He revealed how the construction industry has experienced the most significant surge in liquid cases in the past few years.
“The largest growth in the liquidation space [has] probably unsurprisingly been in [the] construction sectors. You would have seen month-to-month front-page news with construction businesses going out of business or going under, maybe not so much in the last few months, but definitely in the last 18 months,” he said.
The escalating cost of living and current economic pressures, as highlighted by Urdea, have exacerbated the financial hardships experienced by various sectors, contributing to the surge in liquidations.
“Other sectors like accommodation and food services [have] been hit pretty hard with inflation, a rise in living costs, interest rates, and just a general slowdown in discretionary spending,” he said.
He further noted how “the macro outlook is probably not likely to improve in any meaningful way in the short term”, indicating that the increase in liquidations is expected to continue.
This upsurge in liquidations poses a significant risk for law firms. Urdea outlines that specific sections within the Corporations Act grant liquidators the ability to claw back payments made to creditors, including legal service providers.
“Sections 588, FE and FF of the Corporations Act cover certain payments that are considered unfairly preferential and allow them to be voided and then be ordered to be paid back to the company that has paid them [and] in liquidation or is experiencing distress.
“So transactions that [are] caught up by these provisions allow a liquidator to have fairly broad powers, to have them clawed back and ask the court to have them clawed back,” he said.
Urdea emphasised how this can profoundly impact SME and boutique law firms: “There’s been an increase of something like 200-plus per cent of companies going into liquidation for the first time since the last financial year. So you’re definitely working in a space where this is a real risk now.”
However, Urdea stressed the importance of focusing on the measures you can implement to “project yourself” rather than being fixated on the potential risks.
He said: “Rather than limiting the type of work that you do and the appointments that you take on, protecting yourself is probably the better starting position.”
Additionally, Urdea emphasised that despite the risks, law firms should not be discouraged from offering their services to companies facing financial distress.
“Our priority as practitioners is to help others and to help businesses, and, as practitioners, that’s what we want to do. We want to do the work. We want to make our client’s lives easier. We want to give them great solutions. We want them to give them ideas that might be outside the box,” he said.
“You don’t want to curtail the primary reason that you’re in work and you’re practising, but also, at the same time, ignoring the reality that is the current space where liquidators are actually increasing their clawback activity would be silly because you’re also running a business”.
