Unexpected things may happen when managing a business or handling your own finances. You can run into troubles that might impact your cash flow or budget and may cause you to experience insolvency. Read on to know more about insolvency and how to hire the right insolvency lawyer.
What Is Insolvency?
Under the Corporations Act 2001, a person who is not capable of paying all debts as and when they become due and payable may be classified as insolvent. For companies, if they can no longer bounce back from the state of insolvency, it usually ends with the company being wound down
Common Causes of Insolvency
Statistics provided by the Australian Financial Security Authority, between 07 February 2022 and 20 February 2022, 328 people from construction, transport, postal and warehousing, and healthcare and social assistance entered into new personal insolvency. These numbers are usually caused by the following:
Not Having Enough Cash Flow
Cash flow is a major factor as to why an individual or a business suffers insolvency, as there is not enough money to cover monthly obligations such as payroll and rent. Emergency repairs and other issues can also create unplanned costs, which may dig you deeper into a financial crisis.
Failing to Separate Business and Personal Accounts
Poor cash and fund management often leads to insolvency. If you are a business owner, you might be tempted to use your company’s assets for personal use. When this occurs, there is a risk of draining your company’s finances and being unable to pay for unexpected expenses.
Too Much Debt
Committing to one financial obligation is okay, but if debt and loans keep piling and as a result your means of getting cash flow is not increasing, insolvency arises. That is why before getting loans or other forms of debt, it is important to think twice if you really need it.
Lacking a Debt Recovery Procedure
Companies which don’t maintain a strong debt recovery strategy are at risk of failing to recoup money owed. This impacts the overall cash flow of your business. Where possible, be sure to request deposits and security from new clients, send invoice payment reminders or advise of the potential penalty of late fees to be sure that you are being paid for your services.
Bankruptcy Vs Insolvency
Bankruptcy and insolvency both deal with financial status, however the terms are not the identical in definition. Insolvency is the state of having insufficient funds for debts and other expenses, while bankruptcy is a court order that gives a legal order on how an insolvent debtor will pay outstanding and unpaid financial obligations. Insolvency can lead to bankruptcy, but some manage to recover from it.
Insolvency Law in Australia
Australian insolvency law governs all principles and regulations for companies that are under financial distress and unable to pay their financial responsibilities. The legislative provisions of the law aim to provide:
- orderly and fair procedures for insolvent companies
- proper handling of claims against the insolvent company
- a pari passu equal distribution of the assets amongst creditors
- rehabilitating financially distressed companies and businesses where viable
- the examination of insolvent companies and their representatives, as well as the reasons for their failure
- engagement with key stakeholders in the resolution of insolvency issues.
What Does an Insolvency Lawyer Do?
Insolvency lawyers assist clients in navigating the Australian insolvency law and a variety of stages relating to the insolvency process. This involves negotiation, company involuntary arrangements, administration and leadership. They can also assist with regards to the process of liquidation. Their assistance is significantly beneficial if you are being sued by creditors, considering bankruptcy or experiencing other legal issues related to debt.
How to Hire the Right Insolvency Lawyer
Before hiring an insolvency lawyer, be sure to check if they are qualified and licensed by researching your local bar association. If possible, you should also review testimonials from past clients through investigation across their websites or social media pages. In addition, get a list of candidates and compare their strengths and weaknesses.
Ask the Right Questions
You should receive in affirming responses during your consultation with an insolvency lawyer by asking the following questions:
- Are you licensed? What is your experience in handling insolvency cases?
- What are your fees? Do you require a flat fee (one-time fixed price) or billable hours?
- How did you handle other cases similar to mine?
- How and when can I contact you?
Fees and Conditions
Beware if the insolvency lawyer is offering prices that are too high or too low. This can mean that they either do not offer high-quality service or have hidden or additional fees.
If you immediately need an insolvency lawyer, tapping into your friends and relatives’ network can introduce you to someone they trust.
Respects You and Your Situation
Dealing with insolvency is a stressful situation and working with an insolvency lawyer who does not respect you often results in additional headaches and unsatisfactory results. You should hire someone who works well with you and is patient if you have a lot of questions.
How Madison Marcus Can Help You
Solving complex legal insolvency matters is a viable option through Madison Marcus and their dedicated division.
If you are looking for an insolvency lawyer in Sydney, Melbourne or Australia, Madison Marcus can assist you. We are an award-winning law firm with experienced lawyers who act for clients in all facets of restructuring and insolvency. We act for borrowers and issuers in the local and international debt markets. Our firm also advises domestic and international funds, as well as Australia’s leading insolvency practitioners.
Our firm acts for the following clients:
- PE funds
- Foreign banks
- Foreign lawyers
- Australian banks
- Mezzanine funds
- Foreign investors
- Foreign hedge funds
- Overseas companies.
- Australian companies
- Australian hedge funds
- Insolvency practitioners
For all enquiries or to book a free 15-minute consultation, contact us today.