Mediation in Insolvency - tips for success

Mediation in insolvency is on the increase.  Not quite on the scale of say, the U.S. (for instance, hundreds of mediations arose out of Lehman Brothers Chapter 11 proceedings alone), but an increase nonetheless.  And almost anything can be mediated, claims by trustees in bankruptcy seeking to overturn property adjustment orders in ancillary relief settlements, disputes concerning the expunging of debts etc.  All mediations give rise to their own dynamic between pursuer and pursued, but none more fascinating than in an insolvency context .  Take an officeholder (an insolvency practitioner or IP) pursuing former directors alleging transactions at an undervalue, preferences or misfeasance.  It’s not personal but their job, and they have a body of legislation to support (and regulate) their actions.  It’s just business as usual.  But to those pursued, it’s an outrage, piling insult upon injury just as they were emerging from the wreck of a failed business.  Rarely is there such a disparity in positions.  Yet there are definite practices that can help generate productive dialogue at mediation.  Here are a few.

Debt analysis

• If there is likely to be a discussion around shortfall in a liquidation (as a separate and distinct topic to claim value), all parties should be ready to embark on a degree of debt analysis. This can be of crucial importance to a former director/shareholder because whatever the claim value, the shortfall, if lower, may often be the high watermark of their eventual financial exposure.  This is because, in many cases, once creditors (and the IP) are paid in full, any excess circles back to them as shareholders.  So all parties should be ready and prepared to have a conversation about bad claims, inflated claims, etc on the insolvent estate, and what the shortfall is realistically likely to be.  As always, preparation is key and the more groundwork that can be done in this area in advance of the mediation, the more conclusive the conversations are likely to be on the day.

Ability to pay

• At some point in many insolvency related mediations, discussion moves from the merits of a claim, claim value, shortfalls etc, to ability to pay.   If and when this happens, the less straight forward a director is in dealing with his assets and liabilities, the more sceptical an IP will become to pleas of hardship.  But IPs are in the business of maximising realisations at minimum cost.  They are not in the business of depleting estate assets or taking on liabilities, contingent or otherwise, to obtain Pyrrhic victories.  IPs usually want to know sooner rather than later if a director really did lose it all propping up an ailing business, or blew it all on fast cars and slow horses, or that, simply, there would be precious little left after contested proceedings.  So they are usually all ears…unless they feel that the wool is being pulled over their eyes!  If hardship is a path that is likely to be trodden, it needs to be prepared well, and in advance.

The role of the IP

• IPs should take time to explain their role face to face. Of course, the director will have been advised appropriately in advance and will have a pretty good idea about the way it all works anyway from dealing with the demise of their business.  But it never seems to do any harm, only good, for IPs to take some time to explain their purpose in life.  And often, it’s not just the words that are spoken; it’s getting the mood music right too!

Directors' engagement

• Directors should also be prepared to engage directly if able and willing to do so. For instance, in a preference claim, an explanation as to why a particular payment made to a connected company was not driven by a desire to prefer but rather proper commercial considerations, can be more impactful (in the sense of making more of a difference to an IP's assessment of risk) if coming direct from the person responsible for making the payment decision, rather than their representatives (or being left as a sentence in a position statement).

One final thought

It is sometimes the case that conflicts arise between former directors pursued by an IP.  They may all want to reach terms with the IP but because they each blame the other for the situation in which they find themselves, they are unable to communicate effectively and become dysfunctional as a negotiating unit vis a vis the IP.  No one director can settle with the IP for fear of just getting dragged back into the fray by another director, and an IP may well be underwhelmed at the prospect of settling with anyone at all if the liquidation cannot thereafter be closed down.  So what to do?  Mediate!  Independent negotiations can be orchestrated between the IP and individual directors, but all negotiations can be co-ordinated by the mediator without the directors having to negotiate with each other.  Each participant thinking about the same issues, at the same time and in the same place!  The key to a successful mediation.