Partner Simon Bushell discusses the global trends affecting the United Kingdom and London’s litigation market in Getting The Deal Through’s (GTDT) Dispute Resolution 2019 Guide.
Accreditation: Reproduced with permission from Law Business Research Ltd. This article was first published in Getting the Deal Through –Market Intelligence: Dispute Resolution 2019 (Published: July 2019). For further information please visit www.gettingthedealthrough.com. Read this on the GTDT website here.
In the last year’s global trends, I began with some observations around Brexit and the fact that political and economic turbulence tends to generate disputes, making London (among other key legal centres) very buoyant in and around the Commercial Court and the London Court of International Arbitration. In this regard, nothing much has changed: no conclusive Brexit deal, political inertia and a stuttering investment climate. Add to this, carnage on the high street caused largely by the dramatic shift in retail trends towards internet shopping.
Restructuring lawyers are presently rubbing their hands together and gearing up for a boom in insolvency related work, some of which will translate into litigation and regulatory disputes. One particular trend in the United Kingdom, which is already emerging is the belated focus on auditors. The Big Four are, of course, under increasing pressure from the EU Commission, and other regulatory bodies – and indeed parts of the investment community – for their perceived dominance and conflicts of interest (as between their audit teams and the lucrative consultancy and advisory businesses which all sit under the same roof). In addition, specific audit regulation is intensifying. In the United Kingdom, auditors are accountable to the Financial Reporting Council (FRC), which appears to be taking action and imposing heavy fines more regularly than in the past. The disputes work generated in the underlying investigations and proceedings can be lucrative. Not only do the accountancy firms require representation but so too do the individual partners responsible for the audit. Reputations are hard-earned but easily lost. Audit negligence claims, on the other hand, are relatively infrequent, largely because typical terms of engagement contain very audit-friendly exclusions and limitations of liability. Many lawyers remain puzzled as to how audit firms have seemingly escaped liability arising from the banking crisis (although, of course, Enron did claim one notable scalp).
One significant constraint in pursuing auditors in negligence is that the range of actionable claims available when auditors are generally accountable is narrow. Typically, only the company itself has a claim against the auditor (rarely the underlying shareholders). Where a company has become insolvent but auditor negligence has occurred some time earlier, it is often alleged by the auditor that they should not be liable for the ordinary trading losses which occurred post the auditor’s negligence on the basis that such losses were the fault of management. However, this line of defence has weakened recently in the context of fraudulent management activity which was negligently overlooked by the company’s auditor. Essentially, the English High Court has held that where an audit is negligently performed and the company in question is allowed to continue trading as directed by fraudulent directors, the auditors are liable for those losses (even ordinary legitimate trading losses); on the basis that the company’s shareholders were deprived of the opportunity to call the directors to book for the dishonest way the business was being run.
Another controversial English law principle which might shortly be eroded is the rule against ‘reflective loss’, which is considered to present an obstacle to accessing justice for the directors and shareholders of insolvent businesses. One particular area of concern is where a particular (often large) creditor is considered to have acted wrongfully towards the company in the run-up to insolvency. That creditor will likely appoint the subsequent insolvency practitioner and there is a perception (if not a reality) that such a creditor may ‘get off lightly’ when it comes to any claims the company may seek to pursue (through the liquidator) against it. In such circumstances, it is suggested that shareholders themselves ought to be free to pursue such claims, but they are precluded from doing so because the purist view is that the true loss has been suffered by the company and the recovery of such loss should ‘cure’ the loss for all shareholders. Equally, a creditor of an insolvent company may wish to pursue a fraudulent director who has asset-stripped the company, meaning that the creditor has no prospect of recovering its debt against that company. Must that creditor fund a liquidation of the company (and the associated costs) in order to have any prospect of redress (and then share such recoveries with other creditors)? As it stands, the reflective loss rule means that only the company (in liquidation) can pursue claims against the delinquent director. The Supreme Court examined all of these issues on 8 May 2019 in Sevilleja v Marex Financial Limited and, as at the time of writing, the judgment is hotly awaited.
Finally, a word or two again about third-party litigation funding. The raising of capital by some of the main players in the market shows no sign of abating. Some commentators consider that there is a surplus of funding and an insufficient number of suitable claims. That may be so, for now. However, funders, and the law firms with whom they collaborate are looking to push boundaries, seeking to open up new geographical markets (for example, Brazil) and to shape the future of the legal principles which can open up access to justice in the area of collective redress. Third-party litigation funders are now a force to be reckoned with, albeit they remain – relatively speaking – risk adverse. They are also acquiring a conscience and showing a generous willingness in some cases to fund clients who are seeking social justice.