What Do Lawyers Do in Insolvency?

When a business or individual faces financial distress, an insolvency lawyer plays a crucial role in explaining the legal aspects of insolvency. They offer strategic advice, negotiate with creditors, and help clients explore options for restructuring or managing their debts.

In this blog, we’ll break down the different aspects of insolvency, the legal framework behind it, its types and how insolvency lawyers assist clients during these challenging times.

What is Insolvency?

Insolvency is a financial situation where a person or business can no longer pay its debts, including amounts owed to creditors. The causes of insolvency can vary; for businesses, it often includes:

• poor cash flow management, leading to an inability to cover debts;
• a downturn in the market or economy, causing a drop in revenue;
• losing major clients;
• making poor investment choices;
• rising costs from suppliers, making it harder to turn a profit;
• high costs from legal disputes or settlement payouts; and
• unexpected expenses from natural disasters or major repairs.

While insolvency is serious, it’s not the end of the road. With the right legal advice, businesses and individuals can explore options to reduce the damage and, in many cases, rebuild.

Insolvency vs Bankruptcy 

Insolvency and bankruptcy are often used interchangeably, but they’re not the same:

• Insolvency is the general term that applies to both individuals and companies, describing the financial state of being unable to pay debts.
• Bankruptcy only applies to individuals and it is a legal process where an individual is declared unable to repay their debts and is managed under the Bankruptcy Act 1966 (Cth).

Insolvency laws in Australia: key legal frameworks

Australia’s laws are designed to provide fair outcomes for all parties involved, from creditors to business owners and employees. The main legislation for insolvency in Australia includes:

1. Corporations Act 2001 (Cth) → This Act sets out the legal duties of company directors, the roles of administrators and liquidators, and the different types of insolvency procedures.

2. Bankruptcy Act 1966 (Cth) → This Act outlines the process of bankruptcy, including how a trustee is appointed, how assets are dealt with and the obligations of bankrupt individuals.

ASIC’s Role

The Australian Securities and Investments Commission (ASIC) oversees the conduct of insolvency professionals and enforces compliance with the Corporations Act 2001 (Cth). ASIC also investigates potential breaches by company directors and administrators.

Types of insolvency proceedings in Australia

If your company is about to reach insolvency, it is important not to panic.  In Australia, there are 4 types of procedures designed to suit different circumstances, financial situations, the structure of the business and the goals of the stakeholders involved. 

Here’s an overview of insolvency procedures in Australia: 

Liquidation

Liquidation is the process of winding up a company’s affairs to formally close down a company. Here, the business stops its activities and assets are sold to repay creditors. Once everything is sorted, the business is deregistered and no longer exists.

There are three main types of liquidation:

1. Creditors’ voluntary liquidation (CVL) → The company’s directors realise the business can’t pay its debts and the shareholders agree to wind it up. Hence, a liquidator is brought in to take control, sell the assets and pay back the creditors.
   
2. Court-ordered liquidation  →  A creditor can apply to the court to wind up a company if it hasn’t been paid and can’t prove it’s financially stable. If the court agrees, a liquidator is appointed to take over.
   
3. Members voluntary liquidation (MVL) → A company is still solvent, but the owners decide to shut it down. It’s often a smart and tax-effective way to distribute leftover assets to shareholders.

Small business restructuring

Introduced in 2021, small business restructuring aims to help viable companies recover from financial stress without the cost and complexity of full administration.

Through this process, small businesses develop a restructuring plan to repay creditors over time. The plan must be approved by a majority of creditors by value in order to proceed.

To be eligible, a business must:

• have total liabilities of less than $1 million;
• be up-to-date with tax lodgements and employee entitlements, and
• appoint a registered restructuring practitioner. 

Voluntary administration

Voluntary administration provides struggling companies with a short pause to figure out their next move and assess their options.

An independent administrator is brought in to take control of the business, review the finances, and decide on the best path forward. From there, one of three things usually happens:

1. the company is returned to the directors (rare);
2. a Deed of Company Arrangement (DOCA) is proposed to repay debts and keep the business running; and/or
3. the company moves into liquidation.
   

The administrator’s job is to act in the best interests of creditors. Directors often opt for administration when they believe the business has a future but need time to restructure or propose a DOCA to avoid liquidation.

Receivership

Receivership occurs when a secured creditor (usually a bank) appoints a receiver to recover money owed to them. The receiver takes control of specific secured assets—like property or equipment—, sells them, and uses the proceeds to repay the debt.

Being in receivership doesn’t always mean the company is coming to an end. If the company has other divisions or assets not tied to the debt, it may continue to trade during the process.

Role of an insolvency lawyer

Insolvency lawyers play an important role in supporting the business and seeking the best scenario based on the current circumstances.  They can assist with:

• representing clients in insolvency disputes and court proceedings.
• explaining legal rights and obligations;
• reviewing and drafting formal insolvency agreements;
• advising on compliance with director duties;
• helping businesses restructure to avoid liquidation;
• negotiating with creditors;
• assisting with voluntary administration or liquidation; and/or 

Advising businesses before insolvency

One of the most valuable aspects of an insolvency lawyer is to provide legal advice. If you suspect your business might be insolvent, getting legal advice early can help to open up options and reduce risks. 

A business lawyer specialised in insolvency can:

• analyse the business’s potential legal exposure due to their financial position;
• recommend ways to reduce debt, negotiate with creditors, and protect assets;
• help directors understand their obligations and avoid personal liability; and
• map out what to do if the business becomes insolvent.

Final thoughts – proactive legal help can save a business

Insolvency lawyers don’t just wind up companies. They can restructure debt, protect assets, and help keep businesses alive. Their role is to simplify the process, reduce stress and guide you to make the best decisions for your future.

We understand that insolvency is complex, but with the right legal advice, it can make a world of difference. Remember: it’s not about giving up. It’s about seeking help and getting back on track.
If you’re facing financial stress, don’t wait until it’s too late. Our team of insolvency lawyers in Sydney at H+A Legal can help you navigate these challenging times, including bankruptcy and insolvency, debt recovery, commercial disputes and more.