What problems does litigation cause for accountants?
Accountants are always looking for ways to add value to their clients, and provide innovative solutions to help their business clients manage financial risks, free up cash and maximise profitability.
One area where businesses could really benefit from their accountant’s advice is legal costs.
Any business in a legal dispute is likely to be spending significant sums for the lifetime of the dispute. Litigation can also come at the worst time for cash flow, with many disputes emerging from the aftermath of some kind of financial loss – whether a contractual dispute, a shareholder issue or a case of professional negligence.
What would be helpful for many business owners and finance directors is a way of shifting litigation risk from their balance sheet, but still benefit from any successful legal action. The financial risks and issues we are talking about are:
- the effect on the balance sheet of the contingent liability to pay opponent’s legal costs in an unsuccessful action;
- the effect regular payments to lawyers has on EBITDA (the effect of which is not even alleviated by winning the case because damages recovered are dealt with differently);
- contingent assets, such as damages that could be recovered in successful litigation;
- contingent liabilities of future potential disputes (such as product liability claims) and the problems they can create during M&A deals.
Professional litigation funding businesses are set up to manage these risks and investors fully understand the business model. For businesses that don’t specialise in funding litigation, the challenges that these issues create can sometimes be insurmountable, and can result in cases being dropped, lost or under-settled – not as a result of the legal merits, but simply because the relative financial positions of opponents can be just as important, if not more so.
The ability to shift risk, bring financial certainty to litigation and crystalize contingent liabilities are all valuable tools. Accountants are in a unique position to highlight these options to their clients.
What help can we give accountants with their clients’ litigation?
Let’s take a simple example.
An SME has a claim for professional negligence against a surveyor, to the tune of £170,000.
The owner of the SME could choose to instruct lawyers on an hourly billing model and enter into the litigation process with no certainty over what the ultimate cost or recovery could be: If all goes well, they might recover much of their legal costs and also their £170,000 damages.
However, if the case is unsuccessful (or the SME finds it difficult to maintain funding for the action) then the case could be lost, the business could have spent £50,000 to £80,000 (typical legal costs for a case of this size) and also have to pay the opponent’s legal costs – perhaps another £50,000 to £80,000.
This means that at the outset of this case the business owner has to weigh up risking as much as £160,000 (both sides’ costs) with the possibility of recovering £170,000. This does not look attractive, and that’s without even considering the effect on, cash flow, EBITDA or other side effects…
As an alternative, the business owner’s accountant might suggest transferring all of the financial risks of litigation onto another balance sheet (that of a professional funder and insurer). In exchange for taking all of the litigation risk, the funder may seek around 5% to 35% of any damages recovered (the range being dependent upon when the case settles). So the client has shifted 100% of the financial risk but will keep at least 65% of the damages.
Why Annecto Legal?
The team at Annecto Legal are available to provide guidance to accountants across all option of litigation funding and insurance so they are able to explore all options available to their clients, rather than allow strong cases to fall away or under-settle due to lack of funds.
Annecto Legal is happy to receive enquiries from accountants exploring funding options on their clients’ behalf. Talk to an expert today.