A leading law firm has warned that the year ahead is shaping up to be one where the risks to professionals and their businesses are set to increase significantly.
Jim Oulton (right) and Tim Shepherd (left) partners in the Litigation Group at Mayer Brown International warned corporate failure will see heightened levels of scrutiny.
“ Recession, inflation, rising interest rates, supply chain disruption, economic uncertainty, asset value volatility to say nothing of societal change, tensions between super powers and war are all ingredients which will see many business challenged in 2023,” Oulton said. “Whilst some businesses will struggle others will become insolvent. In challenging economic times lenders will no doubt be concerned about security and carefully review covenant compliance – some asset values will be impacted by some or all of the above factors and consequently have an uncertain or reduced value.
“What does that mean for professionals? In the aftermath of corporate failure or under performance, their work tends to be subject to levels of scrutiny not applied in benign times. Fresh eyes are brought in to examine the causes of failure or under performance – be they the eyes of Insolvency Practitioners or others.”
Shepherd added: “The scrutiny that is applied to the work done by professionals in different times is scrutinised with the benefit of hindsight. Legally that is usually an inappropriate basis upon which to criticise someone but it is what often happens. Simply because an asset has fallen in value does not mean that it was negligently valued at a prior time – but the levels of scrutiny as to how it was valued may be tested – and assumptions made at the time robustly challenged. Similarly in the wake of corporate failure or underperformance auditors’ understanding of risks in a business, or the way significant contracts have been considered can be subject to a microscope powered by hindsight. Was revenue recognised appropriately? Were important contracts and dependencies appropriately considered?”
They added the work of lawyers often comes under scrutiny, and questions asked about whether contracts operate as intended, with, no doubt at the moment, particular focus on supply chain problems and the whereabouts of risk and responsibility for rapidly changing cost.
“As economic times change contractual formulae – which have numbers entered into them which were simply not considered at the time they were agreed – sometimes produce unexpected results,” explained Shepherd. “Important questions can arise for clients and many different professions as to where responsibility may lie in such circumstances.
“What does this mean? Will we see more claims against professionals in 2023? Probably. Will we see a flood of such claims? Past experience tends to suggest that will probably not be the case – but that is not to say that more claims will not follow in time – they probably will. Not least as many potential claimants will, in times of uncertainty, manage their cash resources away from spend which is perceived as discretionary.”
What has changed since this country last saw recession? Oulton said two things in particular come to mind.
“First, in the wake of significant corporate failures regulators are more likely to become directly involved at an early stage – so regulatory inquiry and investigation is now often an early feature. Second, litigation funders are now visible and active in a way which they were not. This means Insolvency Practitioners and those who feel they have lost because of the failures of professionals have (or potentially have) access to third party funding to bring claims.
“Some may point to another change –some lawyers have suggested that the Supreme Court of England and Wales’ decision in Manchester Building Society v Grant Thornton in 2021 amounts to a re-drawing of the scope of the duties of professionals – making them more susceptible to claims. It is certainly a re-shaping of the test that had previously been applied to such issues. However, the suggestion that it has eased the position of claimants litigating in England and Wales is not a view shared by those who defend professionals. There is no obvious pattern suggesting the English Court has become more claimant friendly.”