Article source: Mallesons

Introduction

No business sets out expecting to face financial distress. But cash flow problems, rising costs, and economic pressure can catch up with even well-run companies, and when they do, the difference between recovery and collapse often comes down to how early a business gets proper legal advice.

Restructuring and insolvency law exists for exactly this moment. It’s the area of law that helps directors understand their options, protects creditors’ interests, and—where possible gives a struggling business a genuine path back to stability rather than an inevitable slide toward closure. For Australian businesses navigating financial difficulty, understanding when to call in this kind of legal support can make all the difference.

The Scale of the Problem

Unfortunately, the number of financially distressed Australian businesses is constantly growing. According to ASIC’s statistics, more than 11,000 companies entered into external administration for the first time in the 2023-24 financial year. The majority of insolvencies involve small and medium-sized businesses that have moderate assets, less than 20 employees and liabilities under $1 million.

Industry analysis reveals that the most typical causes of insolvencies are not the fraud and mismanagement of directors but poor cash flow, trading losses and economic conditions. The construction sector continues to suffer the most of the problem, though the hospitality sector has also demonstrated significant growth in external administrations.

However, what has changed over time is the solution offered to financially distressed companies. Small Business Restructuring, which offers businesses to restructure within 28 days with the help of a restructuring practitioner and stay running in the meantime, has become very popular among companies. Only two or three years ago, there were only a few hundred appointments in its first full year, whereas currently, the number has risen up to several thousands. The outcome of such procedures has been rather positive, with most companies being able to continue their business activity.

Warning Signs of Financial Distress

One of the characteristics of financial distress is that it does not appear suddenly but occurs gradually. It means that there will be some warnings before the company goes bankrupt. The clearest warning signs include inability to pay suppliers and employees on time, use of one type of credit to repay other types of credit, high tax debts with ATO and actions taken by creditors to force payments.

None of these warning signs indicate automatically that a company is insolvent, but they definitely require some serious consideration and consulting with a law firm. One of the key factors in the necessity to get proper advice from a law firm is that the Australian directors are personally responsible in case the company becomes insolvent.

That is why acting timely and avoiding the worst outcomes is a lot better option than facing them and trying to find the solution to the problem.

Why Early Legal Advice Is Critical

The key thing that defines the outcome of the procedure for financially distressed companies is the time when they have started. If a company seeks advice before it is unable to pay its creditors, it will have a wide range of solutions available to it, while delayed reaction will leave only one or two options.

Apart from that, there are also some legal protections that allow Australian directors to avoid certain claims if they react timely and appropriately. In particular, there are safe harbour provisions that can protect directors from claims for insolvent trading, provided that directors took actions when they suspected that a company was in financial distress. Acting according to the provisions, however, requires professional advice on the part of a law firm from the very beginning.

In addition, a restructuring and insolvency lawyer can help a company to understand what solution will suit it the best – negotiating a deal with creditors, restructuring, voluntary administration or orderly winding-down of a business.

What the Process of Restructuring Looks Like

In case a company qualifies for Small Business Restructuring procedure, it involves a lot fewer disruptions compared to the voluntary administration. Unlike a voluntary administration, the company does not pass to an external administrator and remains under management of the directors. A restructuring practitioner is appointed to create a plan, which will be discussed and approved by creditors.

Such arrangement works well exactly because those who know how to run a company remain at the same place, while financial aspects of its activities are being worked out. In contrast to liquidation, the company stops operating and its assets are sold off to repay the amounts that are owed. For this reason, small and medium-sized businesses are more inclined to solve their financial problems thanks to such middle-ground, which means that seeking legal advice has become less intimidating.

What to Look for in a Law Firm

It is not always necessary to hire a specialized law firm in order to receive proper legal advice on some issue. However, in case of restructuring and insolvency, this advice should come from specialists, who are familiar with this kind of situation, know how courts and organizations like ASIC react to them and can act promptly if the circumstances demand this.

For example, Australian law firms such as Mallesons list restructuring and insolvency among their practice areas, alongside corporate and mergers & acquisitions, banking and finance, dispute resolution, employment, tax, competition, technology, and intellectual property. Reviewing a firm’s published practice areas can help businesses determine whether it offers experience relevant to their legal needs. 

Conclusion

Bankruptcy is not an end for a company but a problem that can be solved with the help of proper and timely legal advice. As it has been said earlier, businesses that use restructuring processes are much more successful than those that neglect it.

If you want to prevent your business from bankruptcy, the easiest thing to do is to contact a law firm that provides such services on time.