Litigation warning – remember the cycle!

 The pattern of litigation tends to be cyclical since it shadows the economic cycle. When there is general prosperity and businesses flourish there is still plenty of litigation (when is there not?) but its character reflects boom-time activity. Businesses buy other businesses and then claim that they overpaid. Although the reality is that their “due diligence” was neither due nor diligent, they will allege misrepresentation, negligent or fraudulent, and both parties will finish up suing their advisers anyway.

As ever, the lawyers and experts will emerge as the real winners

Successful businesses lose their key players who perceive an opportunity to set up shop on their own. The ensuing litigation will dredge up everything from breach of restrictive covenants to theft of customer databases and goodwill. As ever, the lawyers and experts will emerge as the real winners from the bitter heap of acrimony.

And there’s always tax. Even in the good times no one wants to pay it. The fine distinction between mere mitigation advice and recourse to clever avoidance devices can be muddy. Either way, the potential for litigation is abundant: if a “scheme” doesn’t work the client will want his fees back plus any consequential penalties; and if the advice was too tame it will be alleged that tax-saving opportunities were missed. And so on.

 It’s different now

Today the hazards for unwary professionals are just as great, even apart from the welter of alleged audit failures. Banks have long forgotten how to assess risk or security. After a decade of grossly incompetent lending, during which the sober appraisal of finance applications was supplanted by a self-certification “lie-to-bet” frenzy, the dust has settled on a wasteland of sub-prime dross. Not surprisingly, such fundamentals as borrowing multiples, security margins and continuity of borrowers’ earnings are at last returning to their hazy consciousness.

But will they do the work? Eighteen years ago, in the trough of the last cycle, in my articles and lectures I issued loud warnings about banks and building societies that would choose the easy option of obtaining an accountant’s opinion rather than do their own vetting of borrowers’ ability to service loans. There was no shortage of obliging suckers. “This opinion is given in good faith and without liability. We have acted for Mr Rupert Eccles for over 20 years and to the best of our knowledge and belief he is a man of utmost integrity. Based on his most recent business accounts, which we have prepared, we confirm that Mr Eccles should have no difficulty in servicing a loan of £350,000 for a 25-year term. Signed, Muggins & Co.”

Well, our man of integrity promptly sent his three children to private boarding schools and defaulted on his repayments –  so the bank sued his accountants. We all want to help our clients, but at what personal risk? Even the “without liability” formula may be of little avail in law once a clear duty of care is accepted.

The variations on this theme are virtually without limit, but in all cases the golden rule applies: certifying past income per the client’s tax return is reasonable, but never give comfort on his future financial capability. As for certifying the value of personal net worth – well, for another 50 quid you can have your brains tested!

This warning applies equally to surveyors regularly called upon to value security. Given that so much lies in the realm of opinion there will always be an “expert” willing to express an opposing view with the utmost conviction.

Given that “prudent lending” has virtually become a contradiction in terms, banks will exercise their caution by their usual ploy of seeking insured scapegoats to cover their consequential losses in the next round of lending disasters.

Ah, plus ca change………… How long is your memory?