CHOOSING SURVIVAL OVER LITIGATION
MARCUS MCCAFFREY
PARTNER, FORENSIC SERVICES, BAKER TILLY
WHERE previous recessions have seen problems of funding, this time round global financial liquidity has shrunk to unprecedented levels. There are still few re-financing options and what is available is only on offer to those entities with strong balance sheets or guarantees.
One result of this is that international litigation is at a low. The pursuit of fraud cases is also much reduced. Our clients are deciding against litigation, often in favour of mediation. This is because it is too costly to pursue claims, despite insurance rarely meeting more than a fraction of losses. Clients understand that applications to overseas courts and instructing accountants to locate recoverable assets in jurisdictions that are not necessarily amenable to legal process, can be expensive, and has no guarantee of success.
The choice is clear: do companies spend funds on pursuing claims or on saving the company from insolvency or market loss? The decision boards often take now is one of survival, with a view to recovery later on.
This does not apply across all litigation. There has been an uptick in contentious insolvency and contractual defaults. Companies are also being robust about protecting intellectual property and litigating any loss of market share from theft.
We are finding in our own investigations the breathtaking extent to which companies raised finance from counter-parties, against toxic, non-existent or highly-geared special purpose vehicles. As some financially over-extended themselves to capture market share during good times, they turned to ever more onerous options to meet their re-financing obligations when the market contracted. One of the consequences of restructuring and insolvency work is discovery of fraud.
The Civil Justice Council’s up and coming publication on the review of legal costs is a reminder that if the UK legal system wants to remain a centre for litigation, it needs to be competitive.
CAPABLE ACCOUNTACY FIRM
The reassessment of fee arrangements will be central to this question, with contingency fees gaining increasing support. The issue for clients is that instructing a capable accountancy firm to undertake international fraud investigation work on a contingency basis will be difficult. Ultimately, if the client is to stand any chance of recovery, engaging firms on an appropriate basis will be critical.
As market liquidity returns, there is an expectation that clients will pursue claims, especially where fraud has occurred. In the US, there have been over a dozen class action filings in the first half of 2009 relating to Ponzi schemes, according to Stanford Law School. In the UK, the picture is less acute but we would be wise not to underestimate the amount of fraud that is sitting on many companies’ balance sheets and the potential litigation to come.
Clients still need to challenge their advisors, though. They should be pressing them to answer questions about how accurate the cost benefit analysis is and where the downsides to pursuing claims lie. In international fraud litigation, this is not always a simple question to answer. Often it relies on the appetite to pursue the matter and the adoption of an appropriate litigation strategy.
The ability to move quickly and secure evidence is vital to ensure costly work does not have to be done after evidence destruction. This requires lawyers and accountants to direct the client in their thinking. If records are destroyed or compromised and third party disclosure orders are not viable, then the ability to convert intelligence into actionable evidence is crucial.
But this is not easy and clients would be well advised to think of the risk reward trade-off. In such a marketplace, survival must be the determining principle.
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