Successful mediation in insolvency cases

Introduction

As a result of the Churchill case (see link) disputes arising from insolvencies will increasingly be referred to mediation. Insolvency cases have some different dynamics which can create obstacles to getting the case settled (barriers to resolution) in mediation. These differences are worth thinking about if a mediation is to have the best chance of success. This note looks at what some of the key differences are and the solutions and approaches which make settlement of insolvency disputes through mediation more likely.

Mediation is mandatory

Mediation is now mandatory for almost all UK civil cases (see link). Two exceptions to that rule may apply to insolvency cases; (1) where injunctive relief is required (e.g. to protect assets or evidence at risk); and (2) where the case can be disposed of on a summary basis. The courts have laid out the standard procedure they will follow, namely at the CCMC to stay the proceedings for a short period to allow mediation to take place (see Northamber PLC v (1) Genee World Ltd (in liquidation) (2) Mr Ranjit Singh (3) Interactive Education Solutions Ltd – [2024] EWCA Civ 428).

Given that c.73% of cases settle at mediation and c.20% of those which do not then settle shortly thereafter, this means most cases will end not with a trial but with a mediated settlement agreement. For those involved in litigating insolvency cases that means they need to be as good at negotiating in mediation as they are in dealing successfully with the formal dispute process.

Mediation is the friend of the insolvency practitioner (IP) and the other parties to insolvency disputes

The objective of the IP is to protect and realise the assets of the insolvent estate to maximise recoveries for creditors. Disputes often arise with former officers of insolvent companies regarding the ownership of assets, their conduct, debts they owe, or with other stakeholders, or with suppliers and customers. These claims can be difficult for IP’s to fund and can take a long time to resolve. Mediation efficiently resolves disputes quickly and at a fraction of the cost of litigation. This means claims can be liquidated at pace, allowing the IP to secure better and quicker results for creditors.

For other parties, being in litigation with an insolvent estate is no fun. Even if successful, they may not recover their costs. And for former owners, officers and perhaps other stakeholders, insolvency claims can be life changing in many ways. So mediation makes sense for the other parties to insolvency disputes too.

The particular dynamics of insolvency disputes

No two cases are the same, but in my experience insolvency cases have some different but common dynamics.

• Relationship vacuum - the appointment of the IP creates a break between the past history of the insolvent estate and the future. It means prior relationships no longer have any material relevance and there is, in most cases, no prospect of a continuing relationship. IP’s understand this, but other parties often do not and it can be very difficult for them to accept, process and move beyond this fact.
• Emotional imbalance - there can be a complete imbalance in emotion between the parties. IPs, perhaps backed by litigation funders, typically view a claim as a hard, commercial, economic asset. In contrast the other party, especially where they are an individual facing personal insolvency, or perhaps a former owner or officer of the company, can be driven substantially by emotion, for example because they have lost their business or company, they are already under financial strain, they did not expect the IP to sue them, they did not at the time think what they did was wrong and could be challenged under insolvency laws, or they are finding it difficult to talk to their families about the position they are now in.
• Financial constraints - all litigants look at the commercial implications of a case, as well as the legal merits. This is all the more important for IP’s, as there may not be much money in the insolvent estate to spend on litigation, and creditors will be looking over their shoulder to determine whether money spent on litigation is going to produce a positive net return. The insolvency may have created financial difficulties for the other parties to the dispute even before the litigation began, and for them there will be a risk they may not recover their costs even if they are successful. So money available to fund costs and any settlement is often tight on both sides.

Addressing those dynamics in mediation

Success with mediation in insolvency depends usually upon getting all parties to take a pragmatic view of the commercial risks involved. However if factors like those highlighted above are present and creating barriers to getting the case settled, these need to be dealt with first to create the right environment for a focussed commercial negotiation. The key success factors are:-

• Lower the non-commercial barriers to resolution - what might be regarded as peripheral issues, such as the relationship and emotional issues highlighted above, can play a significant but often unspoken part in negotiations in mediation. They can cause people to refuse to negotiate, or to compromise sensibly, or to focus rationally on the legal and commercial issues. Work with the mediator to surface, address and lower these barriers.
• Address these barriers before the mediation meeting - mediation is often viewed as starting and ending with the mediation meeting (whether virtual or in person). Whilst the mediation meeting is critical it needs to be set up for success. The time between the signature of the mediation agreement and the mediation meeting should be used to address (or at least start to address) barriers like those highlighted above, in order to create an environment where the parties can have a better, more productive and more focussed commercial negotiation at the mediation meeting.
• Focus on risk - with other barriers to resolution at least lowered, the parties can then concentrate on the legal and broader commercial issues and the risks they each face. But in may cases they will need help, i.e. a simple framework which enables them to evaluate risk/opportunity objectively, the trade offs and the options available to them, taking into account not only their view but, as importantly, the likely perspective of the other side. I have a simple toolset which I use to help parties to do this.

So insolvency cases are different and require some different thinking in mediation if they are to have the best chance of being resolved. Considering these issues and thinking differently about how to approach them can take a little more time. But the opportunity cost of not settling an insolvency case can be high, and so in my experience it is time very well spent.

Mike Henley