Ground-Hog Day? The Next Global Financial Crisis

The global banking sector has been an international source of panic this past fortnight, with the collapse of California’s Silicon Valley Bank, New York’s Signature Bank and Switzerland’s Credit Suisse plunging into the red zone. White-knuckled investors across the globe are closely scrutinising any new developments in the financial sector out of fear that we may be approaching a more comprehensive financial emergency like the 2008 Global Financial Crisis. In this article, Litigation and Dispute Resolution Senior Associate Lachlan Boyle and Law Clerk Riley Hickey explore the current crisis of confidence in the stability of international finance.

Credit Suisse is a Swiss multinational investment bank coined the second largest lender in Switzerland.  The recent share-price plunge was provoked by the Bank disclosing material weaknesses and deficiencies in its financial controls and reporting. It intensified concerns regarding its shaky foundations, ultimately prompting the mass exodus of existing customers. These events prompted a coordinated sell-off of Credit Suisse stock with broader implications across European markets, where all major indexes suffered a sharp decline.

Growing Concerns for the Next GFC

The failure of these major banks has far more significant implications for the global financial system, as the world anxiously anticipates a domino effect of fallout on the international scale.  While policymakers have reassured investors considering the turbulent conditions in the financial sector, ambiguity and uncertainty persist. Authorities have notably reiterated a distinction from the 2008 global financial crisis, albeit these assurances have seemingly fallen on deaf ears.

The hallowing aftermath of the GFC prompted regulators to tighten their belts regarding global financial systems. As such, tighter restrictions were implemented to ensure that banks across the globe can effectively withstand challenging economic conditions and stock market surges. Significant central banks were allegedly supposed to house metaphorical ‘war chests’ to maintain enough capital to ensure severe bank failures are minimised as part of the international efforts to achieve this objective. However, the recent events in the banking sector have inevitably called these practices into question.

Australia’s Position

The world will watch all major banks as investors remain braced for further share market turmoil as international regulators attempt to re-establish confidence in the global financial sector. However, the Council of Financial Regulators, consisting of the Reserve Bank, banking regulator APRA, ASIC, and the Treasury, have jointly advised that the Australian baking sector is solid, well-capitalised, and in a much stronger position than other nations to deal with the challenges of the global economy.

Irrespective of this position, experts anticipate that the Australian share market will inevitably open weaker considering the crisis, big banks will experience higher wholesale funding costs, and lending practices will likely be restricted moving forwards. While the stock losses on the ASX have been largely contained, Australia’s economic growth is based rests on shaky foundations considering the recent unprecedented interest rate increases in recent months. As such, it is imperative that Australians actively work towards ‘damage-controlling’ their financial positions with sufficient capital to withstand the turbulence of the international banking market and associated domestic repercussions.

Insolvency Options

Considering the recent international events relating to the banking sector, the floodgates of corporate insolvency are expected to experience a significant surge. Some examples of corporate entities which have recently collapsed include one of Australia’s largest home builders, Porter Davis Home Group, and renowned construction firm Lloyd Group. For struggling businesses, now is the time to take a stock-take of your financial strategy and to consider your options in pre-emptive anticipation of future insolvency.

Insolvency occurs when a company cannot repay due and owing debts. Like many other Australian businesses facing the brunt of the challenging economic conditions, business owners may contemplate closing their doors to avoid future negative consequences. Insolvency may be an inevitable next step if the financial struggle is unavoidable. Standard corporate insolvency procedures for insolvent companies may include:

(a)       Liquidation

(b)       Voluntary administration

(c)       Receivership

Liquidation

Liquidation is the unfortunate process where a business is involuntarily shut down or ‘wound up’ to satisfy outstanding debts. As such, all activities associated with the business are stopped, the business is shut down, and its assets are sold. The proceeds of the sale are then used to contribute to repaying the business’ outstanding debts.

Liquidating a business and dispensing assets can be a challenging process, and it is essential that you appoint an expert liquidation lawyer to provide you with the relevant legal advice. Ramsden Lawyers has specific expertise to tactfully assist you in navigating the liquidation process to ensure that you fulfil the relevant legal obligations.

Voluntary Administration

Alternatively, voluntary administration is a process pursued where a company is insolvent or likely to become insolvent, which aims to rescue the company from financial hardship. The powers of officers of the company are suspended as soon as the administrator is appointed, and the administrator then takes control of the company to impartially manage its affairs until the creditors determine the course of action through a series of creditors meetings. The purpose of the appointment of the administrator is to:

(a)       maximise the chance for the company to continue its operations

(b)       if this is not possible, achieve a better return for the company’s creditors (as opposed to the immediate winding up).

Navigating the process of voluntary administration can be a compilated process, and we encourage you to seek legal advice from an experienced dispute resolution solicitor. If you are a director or shareholder, Ramsden Lawyers has specific expertise in navigating the process of voluntary administration, which may include locating and appointing an administrator to manage the process.

Receivership

Finally, a company enters receivership where a secured creditor appoints a receiver to take control of some or all the company’s secured assets to protect the interests of the relevant creditor. A secured creditor is someone who maintains a security interest over some or all of the company’s assets, which may include a mortgage over assets such as real property or a PPS registration over assets such as debtors or stock. The objective of receivership is to allow the secured creditor to recover any outstanding debts through the appointment of the receiver who seeks to have the assets which are the subject of the security realised to enable payment of the outstanding debts. While it can be confronting for businesses facing economic challenges and adversity, various options are available to business owners, directors, and shareholders. For more information regarding your options concerning any of the above procedures, you must seek legal advice at the earliest opportunity.

RAMSDEN LAWYERS – HOW WE CAN HELP

Navigating insolvency can be complicated for business owners, especially in times of uncertainty in the international banking sector. If you are concerned about your business’s financial position, we encourage you to seek professional advice to consider your options at the earliest opportunity.

If you are seeking legal advice, Ramsden Lawyers can assist you. We are happy to arrange an obligation-free initial consultation to assist you in navigating the relevant legislation for your circumstances. Our Litigation and Dispute Resolution Division has specific expertise in helping companies navigate insolvency and to assess what option may be the preferable course of action.

The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice.  Specific advice should be sought about your circumstances.