Insolvency

What happens when things go wrong? If a company runs out of money or the finance director commits a fraud? If a product does not go down well in the market, or a competitor beats it with something better?

What’s it all about?
If a company loses money on a speculative venture or if a major debtor fails to pay a bill? If technology overtakes its reason for existence? If a bank refuses to lend more money or just pulls back its facilities?

There are many reasons why a company can slip into insolvency, or possible insolvency, but whatever the reason, the effect can often be crisis.

What is the solution to the crisis?
Can the company survive by rationalising its business or selling off part of its enterprise? Is the solution a merger or a takeover of a smaller competitor with better products? Can the directors carry on trading, and if so how can they avoid the legal pitfalls of wrongful trading that can sometimes lead to personal liability? Has the company fallen so far that it cannot be rescued outside a formal insolvency process, and if so which insolvency process is the right one? Should a competitor buy a company in trouble, and if so how does that competitor bid for the assets and ensure that it too is not tainted by the insolvency? How should the employees and their pension funds be protected? If the company is listed on a stock exchange, what role does the stock market and the stock exchange have? If the company has been the victim of a fraud, or if executives in the company have committed fraud, should the police or the Serious Fraud Office be involved?

At the heart of all these questions is a legal solution. Without a careful application of the law to what is often a very dramatic and fast-moving situation, it is not possible to identify and implement a solution.

Skills required
Insolvency law can be very technical, so do not be fooled by those who think insolvency lawyers are permanently at lunch. The law is also very fast-changing and increasingly international. Insolvency lawyers are as likely to be considering cases from a Bankruptcy Court in New York as from the High Court in London.

Because insolvency lawyers are involved in a dynamic and distressed process they need to develop an instinct for all other areas of law and know enough about those areas in general terms.

Advice often has to be given quickly, commercially and directly, without much time to produce dissertations from hallowed libraries. Even if lawyers do have time to write it, the client often does not have time to read it, and so the art of direct, punchy solutions is very important.

You also have to be more than a lawyer, particularly if advising directors of a company collapsing around them. You must be a good listener, able to understand and manage relationships, occasionally be assertive, while always staying close enough to the problem to understand it and assist in resolving it – but not so close that you lose your objectivity and become part of it.

Recent developments
A lot of people may well have been lulled into a false sense of security over the past few years. While everyone hears the words “markets can go down as well as up”, what they remember is “markets go up”. The same is true of house prices and salaries, but not inflation, which is always expected to go up.

How things change. Some senior bankers and professionals in the City of London at a senior level have never known a marketplace in which recession is real. So much for abolishing the days of boom or bust.

Thanks to the credit crisis, the collapse in confidence in the financial markets and housing and retail sectors, builders and everyone else who benefit from so-called ‘discretionary spending’ are finding the current times very challenging indeed. It is therefore an appropriate time to look at the ‘black arts’ of insolvency and be aware that an exciting and rewarding career is available.

Working culture
This area is a fascinating part of the law for those interested in applying legal solutions to rapidly evolving problems, where the very life of a company and all it stands for is at stake. If you prefer practising law at a leisurely pace, without the drama of a collapsing company, redundant employees or tight deadlines, this is not the area of law for you.

If it does interest you, then prepare for a highly charged but technical, never-the-same-day-twice rollercoaster ride. And do not make the mistake of thinking that insolvency lawyers are like legal vultures hovering over the commercial battlefield. There is nothing more satisfying than taking part in the successful rescue or restructuring of a major company, with jobs secured and financial meltdown avoided.

Because most companies these days are so complex, this area of the law touches on every other area, from tax to real estate, pensions to company law, litigation to employment law, regulatory to competition law. Also, if the company is an international one it involves interplay between the laws of many different countries.

Stephen Gale is a partner at Herbert Smith