Insolvency mediation - an introduction by Roger Isaacs

Roger Isaacs is a member of the Association of South West Mediators and a Partner with Milsted Langdon LLP.

Mediation is a method of alternative dispute resolution whereby an independent third party (“the mediator”) is appointed jointly by the parties to try to facilitate a negotiated settlement. Typically in Civil and Commercial Mediations, the mediator will use shuttle diplomacy, spending a day meeting alternately with the claimants and defendants, exploring their respective cases and trying to find terms on which all parties would be willing to compromise.

This type of mediation is particularly well suited to cases brought by insolvency practitioners in their capacity as liquidators, administrators or trustees in bankruptcy. Often an insolvency practitioner will seek to recover money or assets from third parties for the benefit of the insolvency estates that they are administering.

Commonly such claims involve allegations of so-called antecedent transactions whereby, immediately prior to the insolvency, assets have been given away at an undervalue or one creditor has been paid in preference to others. Sometimes there can be allegations that money or assets have simply been misappropriated.

Insolvency practitioners are professional litigants and tend to have little emotional connection with the claims that they pursue on behalf of the creditors. Furthermore, they will usually instruct solicitors on a no-win no-fee basis so even their financial interest is likely to be limited. By contrast defendants, such as former directors of insolvent companies or family members and associates of bankrupt individuals can find themselves facing significant financial claims that could, if upheld, have a devastating effect on their lives.

Often this means that if the insolvency practitioners lose their claims, they will suffer no more than having to write off some fees, especially if they have obtained insurance against the risk of any award for adverse costs.

By contrast the potential downside for former directors and others who face claims from insolvency practitioners can be life-changing. It is not uncommon for the consequences of losing a case to be the loss of a home or bankruptcy. On the other hand, insolvency practitioners understand the that there is a risk of taking a case to trial and winning only then to fail to make a financial recovery because the losing party has no money. Persuading a court to order that the losing party should pay the winning party a sum of money is not the same as actually being paid. In many cases, winning at court is only the first step. If the losing parties have no equity in their homes, the victorious litigants may not even be able to recover sufficient to repay their legal costs in taking the case to trial.

It is these dynamics that make mediation a process ideally suited to the settlement of insolvency-related claims. It facilitates an understanding by all parties not only of the strengths and weaknesses of their respective cases but also of the ability of the claimants to make a financial recovery if they are successful.

Often information comes to light during a mediation that profoundly affects one or other party’s opinion as to its prospects of success at trial and significant costs can be avoided by mediating early.

Statistically mediation is also very likely to result in a negotiated settlement either at the mediation itself or shortly thereafter. It is therefore a process that can save costs; avoid potentially catastrophic consequences for defendants and pyrrhic victories for claimants.