NEWS & INSIGHTS

Diversions: Litigation - There's a whole lot of relevance in the circus

For distressed or insolvent companies, sometimes the major route to recovery is tied up in a legal cause of action. However, a misguided approach to litigation can end badly.

When is the court room a good option? We look at the features and limitations of litigation — with the assistance of the Marx Brothers...

When a business fails, quite often that failure is attributed to the actions of a third party – terminating a contract, or withholding a service, or to the actions of a stakeholder (such as a lender), or directors breaching a duty. Trial Funding is quite accessible, and so distressed companies consider litigation a pretty decent recovery plan, even in cases where a company has no cash resources. But does that make litigation a good option? And is it the right thing to do?

THIS MAN’S CASE MOVES ME DEEPLY!!

Conducting a trial is hard work. Prosecutor Groucho might not have made Defendant Cicco look like an idiot in ‘Duck Soup’, but unless you are a comic genius, the witness box is not a place to crack jokes!

"Gentlemen, Ciccolini here may talk like an idiot, he may look like an idiot… but don’t let that fool you, he really is an idiot, I implore you, send him back to his father and brothers, who are waiting for him with open arms in the penitentiary."

Using the court to assist in the asset recovery process is part and parcel of any significant insolvency administration. Litigation has attractive features consistent with managing an insolvency process well. But once the decision to commence a proceeding has been made, it can be difficult to bring to a prompt conclusion. As such, it is worth reflecting on the benefits and pitfalls of litigation generally.

Benefit	Details
Accountability	The process is open, transparent and public, which is of course sometimes necessary in large insolvency cases
Compliance	The system is based on strict compliance with the relevant law overseen by an impartial judicial process
Consistency	Judgements account for the established cases to ensure, where possible, consistent legal precedent
Completeness	Process enables parties to introduce a wide range of evidence and make use of expert evidence where necessary
Finality	It usually grinds out a result, but it can be painful
Outcome	It usually grinds out a result, but it can be painful

I OBJECT!! WHAT GOES WRONG?

There are many limitations to litigation that should be considered:

Limitation	Detail
The outcome is binary	In litigation, a judge declares a winner and a loser and awards a judgment to the winner. There is an outright winner and an outright loser. The process involves imposing a solution, rather than the parties seeking to reach consensus themselves in a flexible way. Binary outcomes are not reflective of the reality of disputes which by their nature have two sides
Publicity over privacy	Most court proceedings and records are open to the public, so there is no guarantee of privacy. The public nature of the litigation process might cause issues if certain facts are disclosed or publicised. Business secrets, customer information and personal data can all be ventilated as part of the process
The time and money dilemma	One can never predict how long the litigation process will take with any certainty. It can take a long time before a court gets to hearing a case after the original dispute occurred – often several months to many years. In cases, a generation can pass by whilst the matter works its way through the system
High cost of proceeding	Court action can be expensive, involving the hiring of teams of solicitors, barristers and other experts. For some cases, the cost to each party exceeds the amount in dispute. Often you are unable to obtain a budget from your solicitor, and rarely are you able to agree a set fee.
Pesky Defendants	A practitioner may confront well-resourced defendants with the capacity to obtain the best legal and accounting advice, particularly in large scale contractual disputes Uncertain advice
Uncertain advice	The clear prospects of a case can be difficult to understand, there can be many conditions, including that the case may fail and costs may need to be paid which is itself an uncertain number
Ongoing cost of appeals	Winning a case may not guarantee an outcome. Most judgments and awards require the loser to pay the winner, but getting the money is not automatic. Locating assets, attaching liens, foreclosing and arguing appeals may be required to get an outcome
Polarisation and positioning	In big ticket litigation, because after the dispute has arisen, the parties are polarised. The Defendant often sees some kind of strategic advantage in declining an offer to mediate, and no one feels they can commence that process without showing signs of weakness
Loss of control	Once you commence, control of the result is given to a judge with no stake in the outcome, and the key interaction is between lawyers rather than the principals, resulting in reluctance to reach out and resolve the matter

A SEA OF UNFRIENDLY FACES: HANG ON WHY AM I DOING THIS?

Prior to commencing a proceeding, particularly where it relates to a pre-appointment asset recovery or contract, there are a number of reasons to pause:

Reason	Detail
Time vs money	There is a significant difference in managing litigation for going concern entities vis a vis insolvency. The practitioner must consider whether, in commencing litigation, there is the prospect of either an early or very significant return from managing the process correctly
Moral authority	It is unwise to look at a particular legal action in isolation of the issues that resulted in the failure of the company. Sometimes failed entities put significant store into one large legal action that will “save the day” and generate the big dividend. The full context of a failed companies activities needs to be understood so that defences to an action are considered. Why did the company fail? What representations did it make?
Poor books and records	The availability of books and records, particularly in big ticket litigation, can be an issue. Obtaining contemporaneous correspondence and evidence in the way of diaries, day books, file notes and reconciliation to financial data etc. is not always easy
Witnesses	In insolvency, relationships with company officers change. Without guarantees or other ways to manage behavior, directors lose interest and move on. Employees become disenfranchised and either resign or travel with a business sale. It is hard to maintain the motivation of witnesses, years on, to stand up and advocate for company to recover funds where they have no stake in the outcome. If a Liquidator is reliant upon former employees as witnesses it gets more difficult to manage as time passes. We have seen cases where even supposedly straightforward affidavits evidence is hard to hold up under cross examination

TEN YEARS IN LEAVENWORTH? OPERATE IN THE MOMENT

There is no short route to pain relief. If you commence litigation without a process to settle it, it can be a long, drawn out affair.

Where there are many stakeholders, asset recovery should be seen as an “in the moment” exercise.

Running a major piece of litigation for many years needs to be looked at in the context of relevance of the ultimate return to stakeholders. When was the money advanced? What connection does a return in three, five or eight years have to the original advance? Are the stakeholders still there and how relevant is the outcome?

The longer the litigation progresses the less relevant the outcome becomes to stakeholders. If a recovery lawsuit could take two years to resolve in court, then shorter term alternatives must be part of the process.

Published 13th February 2025