Managing finances during litigation

Godknows Hofisi
Business & Law

Many people and organisations face legal action from time to time. For organisations legal proceedings are normally civil in nature where for example a company is being sued by a creditor.

It also happens that a company and its officers may also be arrested and arraigned before the courts in criminal matters. For individuals, legal action can be in the form of labour disputes, civil proceedings or criminal prosecution.

Legal proceedings can have life-changing implications on an arrested person, a party that is being sued in a civil matter or an employee who is involved in a labour dispute. I have seen some parties to legal proceedings hitting hard times after lengthy legal processes.

In this article, I wish to give some advice on how a party to a legal process can manage finances or financial risks during the period of legal proceedings or litigation.

Financial risks

The one party starting the legal action is usually more prepared than the one having to defend. Before proffering some solutions I wish to summarise some of the financial risks an organisation or individual can experience as a result of legal action.

These may include:

Legal fees

Inability to pay legal fees. This may compromise one’s legal representation. This is why at times you see self-actors in court due to their inability to pay legal fees. At times legal practitioners renounce agency or stop representing their clients due to non-payment.

Loss of income

Many times it happens that a party to a legal process may lose income during legal proceedings. For example an employee may be suspended by an employer without salary and benefits.

A company in dispute with its supplier may lose supplies during litigation and therefore products to sell or use in production. A supplier in dispute with its customer may not get that customer’s business. It may also happen that due to negative publicity some business partners may refuse to deal with a business or individual that is involved in litigation.

The litigant may therefore lose income during the period or even long term. If one loses income from employment, for example, he or she will not be able to finance living expenses such as food, rent, school fees, medical expenses and others.

This may have far-reaching implications on the person and his or her dependants. A company that loses its income may eventually lose working capacity, fail to finance or continue in business.

Bank loans

For understandable reasons banks try to minimise bad debts or non-performing loans. For this reason, if they become aware that a borrower is being sued or is in court and may not be able to repay the loan they may demand immediate settlement of the debt, assurances or security.

This can result in significant financial pressure on a person or company involved in legal proceedings.

Settlement of debt in the event of loss of legal battle

As a trained finance person I was schooled on prudence. Some people can be so overly optimistic that they do not provide for an unwanted result, that is, a settlement in case they lose in court.

Financial plan and options

One needs a practical financial plan to deal with legal action that is likely to destabilise his or her finances. The same applies to small to medium enterprises which may be thin on liquidity. The plan may include the following:

Legal fees

Discuss with your legal representatives an estimate of the legal fees. If possible, agree on a payment plan including deposits. This will help you know the extent of your financial obligation occasioned by the legal action and how you can settle that.

Source of payment, depending on personal circumstances, may include:

Savings, if any.

Income from employment or business.

Sale of redundant assets.

Assistance by family and friends.

Living expenses

Depending on the nature of the legal action it may be necessary to pay a closer look at one’s living expenses and reduce them. Imagine a breadwinner who is likely to lose his or her job. Where one has been suspended without salary and benefits it may be long before the matter is resolved.

One has to find a way to fund living expenses.

For example, children will still need to eat and go to school. Some people make the mistake of living in the past yet things would have changed.

Where for example a manager is going through a disciplinary hearing or has been arrested at the instance of the company it may not be realistic to expect to go back to work even if cleared as the environment may have been poisoned and the employer may opt to pay the employee off.

Funding for business

Consider cost containment, sourcing bridging finance or replacing the litigating customer or supplier. It may even be necessary to bring a new investor on board to inject funding.

Loans

Engage lenders such as banks and clear interest-bearing or secured loans if possible. This will ensure your debt situation does not worsen through interest or you do not use your asset as security.

Consider compromising

In civil matters, parties may consider out-of-court settlements by negotiating and accepting reasonable compromises. This may also extend to labour matters.

It is advisable to do the numbers and consider your total situation and relevant non-financial matters such as the welfare of your family or business.

In labour matters, depending on the situation, it may be possible to compromise, avoid dismissal and be able to move on.

Conclusion

Legal action brings with it several financial risks. Accept reality and come up with a plan to deal with the risks.

Disclaimer

This simplified article is for general information purposes only and does not constitute the writer’s professional advice. Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot- Watt, UK) is a practising commercial lawyer and conveyancer, chartered accountant, corporate rescue practitioner, registered tax accountant, consultant in deal structuring and business valuer.  He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]

 

You Might Also Like

Comments

Take our Survey

We value your opinion! Take a moment to complete our survey