Litigation: delay at your peril

There’s no time to waste ­ if a director knows that cashflow is a problem and
that his company’s debts cannot be repaid when they fall due he must act

He owes a duty to his business as well as his creditors and must acknowledge
that the company is in financial difficulty and take advice as soon as this
becomes apparent.

Directors who don’t do this may be committing a criminal offence under the
Insolvency Act in continuing to trade a company that is insolvent.

In addition, if they fail to focus on the business and prioritise any issues
with their finances it can also expose them to criticism and possible action
against them by an insolvency practitioner for allowing debt to accrue.
Preference must not be shown to any creditor or the IP will pursue the director

Unless the true intention of any delay was to benefit all creditors, rather
than filing for insolvency as soon as the director is aware of financial
trouble, then there will be repercussions for the director personally.

Take legal advice early

But it’s not just the director who has to think about legal issues
surrounding a dying business. An IP will take action to maximise client
recoveries where it’s apparent wrongdoing has affected the financial position.
In these harsher economic times it is likely they themselves will come under
fire from creditors who do not see viable actions being pursued.

A director and an IP can even join forces to pursue litigation against those
who owe the company money. If the company has been locked in litigation, or
needs to undertake it to recover money, this should be seen as an asset and if
the parties work together they can improve the position of the creditors and
possibly reverse the decline of the business.

It will be imperative to offload the risk however, by taking legal advice
early and monitoring the cost. Unless the legal representation, insurance and
funding package is carefully constructed and the financial implications are
given serious consideration, pursuing litigation may be seen as commercial
suicide. If financial advice hasn’t been taken, an IP may not view such action
in a favourable light.

An IP who needs to undertake litigation but does not do so through fear of
exposing themselves to personal liability for costs is also on shaky ground.
With the availability of insurers and funders in litigation, funding
difficulties need not be problematic. Full protection is available for the IP
from the investigation stage to enforcement. The mechanisms through which an IP
can offset their litigation cost risk have never been so diverse.

This year will see a marked change in the development of the insolvency risk
transfer market as insolvencies increase. New innovative products are due for
release shortly. So now is not the time to become too entrenched with any one
provider as competition is set to intensify.

Ultimately, the insurance sector is a people business with ongoing movement
of personnel between markets so it’s imperative to maintain the flexibility.
What happens if the underwriter offering various forms of comfort leaves that
insurer and is replaced by someone less flexible? Or worse still, that insurer
ceases writing this class of insurance?

Equitable division of the cake

For any firms handling large volumes of insolvency work, specifically
tailored arrangements can be designed rather than using ‘off the shelf’
solutions. Some of those offered can be somewhat eyebrow raising and so it would
certainly be worth exploring options.

With the vast majority of cases settling on a global basis, an equitable
division of the cake can only be achieved by ensuring any risk transfer products
were competitively priced.

An IP needs to demonstrate best value to creditors, which can be troublesome.
They must be aware of the changes and competitiveness of various products.

Insolvency statistics will continue to defy even the most pessimistic
financial analysts. Where litigation is necessary, whether the action is taken
by the director, the IP or both, the cost of doing so need not be theirs to bear
and securing risk transfer terms need not be the troublesome exercise it perhaps
once was.

Offsetting the cost risks

Litigation funding mechanisms

  • Third party funding: also known as professional funding, this is a method of
    financing litigation by a third party
  • Litigation insurance: An policy purchased to cover the costs incurred in
    litigation. ATE Insurance and BTE Insurance are two common forms of litigation
  • Bonds: Bonds are tradable instruments (debt securities) which are issued by
    a borrower to raise capital (
  • Other financial instruments which include the flexibility afforded by
    insolvency litigation lawyers with regards their retainers.

Related reading