Insolvency Lawyer vs Liquidator: Who Handles What in a Business Collapse?

Key Takeaways

• When a business faces financial distress, it is important for them to understand how the roles of insolvency lawyers and liquidators differ.
• Insolvency lawyers provide legal advice and represent businesses and directors during periods of financial distress. Liquidators, on the other hand, are responsible for managing the formal winding-up process once a company is insolvent, in which they realise assets and distribute proceeds to creditors.
• Although their functions differ, insolvency lawyers and liquidators often work together to ensure compliance with insolvency law and to achieve the best possible outcome for creditors and stakeholders.

What Is the Role of an Insolvency Lawyer in a Business Collapse?

An insolvency lawyer plays a central role in guiding businesses and directors through financial distress by helping directors understand their legal position and available options. Their role is primarily advisory and strategic, and includes the following tasks:

• Advising on whether a company may be insolvent;
• Assisting with debt recovery and restructuring strategies;
• Negotiating with creditors;
• Explaining formal processes such as voluntary administration, deeds of company arrangement, or liquidation;
• Preparing legal documentation; and
• Representation of directors and other clients in disputes including through assistance in defending claims, including allegations of insolvent trading.

A key aspect of an insolvency lawyer’s role is ensuring that directors comply with their statutory duties. This includes the duty to prevent insolvent trading under section 588G of the Corporations Act 2001 (Cth) (‘Corporations Act’), as well as advising on the transition to creditors’ voluntary winding-up under section 446A of the Corporations Act. By obtaining advice early, directors can take appropriate steps to minimise risk and ensure that decisions are made in your best interests. The involvement of insolvency lawyers is particularly important in complex matters, where they will guide you on making viable business decisions and ensure you comply with the relevant legal processes.

What Does a Liquidator Do When a Company Becomes Insolvent?

A liquidator is appointed when a company enters into liquidation, at which point control of the company passes from the directors to the liquidator.

The liquidator’s role is to manage the winding-up process in accordance with the law, which involves identifying and collecting the company’s assets, realising those assets, and distributing the proceeds to creditors. Liquidators also investigate the company’s financial affairs to identify any potential misconduct arising from past trading activities and may commence legal proceedings where appropriate.

The powers and duties of a liquidator are derived from the Corporations Act 2001 (Cth), including general powers under sections 477 – 479 and investigative and reporting obligations under sections 533 – 536. In carrying out these functions, liquidators may examine issues such as insolvent trading under section 588G, unfair preferences under 588FA, and uncommercial transactions under 588FB.

Under the Corporations Act, liquidators are authorised to act for the company under section
477. When winding up a company, their main role is to collect and realise the company’s assets and distribute them according to law. In practice, this means paying creditors first, with contributories only receiving any remaining surplus, consistent with section 506(3). As officers of the company, liquidators must also act in good faith, for a proper purpose, and in the best interests of the company under section 181(1). In a winding up, this generally means properly managing the liquidation process and giving primary regard to creditors’ interests. These principles have been recognised in cases such as Re Quatrovision Pty Ltd (in liq),[1] and Global Medical Imaging Management Ltd (in liq),[2] which emphasise the independent and fiduciary nature of the liquidator’s role.

When Should a Business Contact an Insolvency Lawyer Instead of a Liquidator?

A business should seek advice from an insolvency lawyer at the earliest signs of financial difficulty, rather than waiting until the company is no longer viable. Early legal advice allows directors to properly assess their position and consider options that may preserve the business. At this stage, an insolvency lawyer can assist in determining whether the company is insolvent, advise on restructuring options, and guide directors in complying with their obligations under section 588G of the Corporations Act. They may also assist in negotiating with creditors to avoid formal insolvency processes. Seeking advice early can reduce risk and, in some cases, avoid the need for liquidation altogether.

A liquidator is typically appointed after a decision has been made to wind up the company. At that point, the focus shifts from attempting to preserve the business to winding up its affairs, ultimately leading to its deregistration and the distribution of assets to creditors.

How Does an Insolvency Lawyer Work With a Liquidator During Company Liquidation?

During liquidation, insolvency lawyers and liquidators often work together to address legal and procedural issues that arise. While the liquidator is responsible for managing the winding-up process, insolvency lawyers provide legal advice on creditor claims to support that process while assisting with recovery actions and providing guidance on potential claims against directors or third parties.

For example, insolvency lawyers may assist with claims for compensation arising from insolvent trading under s 588M of the Corporations Act, or with proceedings to recover voidable transactions, including unfair preferences under section 588FA, with recovery orders made under section 588FF.

Can an Insolvency Lawyer Help Directors Before Liquidation Begins?

Yes. Insolvency lawyers play a critical role in advising directors before liquidation begins, and this is often the most important stage at which advice can be obtained. They assist directors in understanding their statutory duties, including the duty to prevent insolvent trading under section 588G of the Corporations Act, and in assessing whether the company may be insolvent. They can also advise on the availability of the safe harbour protection under section 588GA, which may protect directors from liability for insolvent trading if they are developing and implementing a genuine plan to restructure the company.

Insolvency lawyers can help directors prepare for potential investigations and ensure that decisions are properly documented and supported. They also assist in exploring restructuring options, such as voluntary administration or informal arrangements with creditors, which may avoid the need for liquidation. By seeking advice early, directors can take proactive steps to mitigate financial distress and reduce the risk of personal liability if the company later enters liquidation.

Conclusion

Understanding the different roles of insolvency lawyers and liquidators is important for businesses facing financial difficulty. Insolvency lawyers provide advice and guidance to help directors understand their options and obligations, especially in the early stages. Liquidators, on the other hand, take control once a company enters liquidation and manage the winding-up process.

Getting advice at the right time can help directors make informed decisions, fulfil their legal obligations, and achieve better outcomes for the company and its creditors.

We’re with you

If your business is facing financial distress, feel free to reach out to the Insolvency Team at Chamberlains Law Firm. Our experienced insolvency lawyers are here to guide you through every step of the process. We’re with you.

 

[1] [1982] 1 NSWLR 95 at [102] – [103].

[2] [2001] NSWSC 481at [1].