Litigation Risk Assessment (Corporations and Individuals)
With many businesses forced to closure, or even winding up, stemming from an inability to pay its debts, the need for Litigation Risk Assessments has become a necessity. The same applies to the vast amount of sequestrations connected to the closure of businesses.
What is Litigation Risk Assessment?
Litigation Risk Assessment entails examining a business from top to bottom and tabulating the actual and potential risks to the business and those running it faces with regard to litigation. Litigation in this sense refers to that which results in liquidation and sequestration. Once we have analysed your litigation risk, we provide reports with workable and realistic solutions outlining risk alleviation, reduction and management. The assessment is business/client-specific, and therefore the tools used and the solutions provided would be different for every business and individual.
An example of a Litigation Risk
Let us provide a fictitious example of where a Litigation Risk Assessment can limit the risk of the demise of you and your business. Let’s say you have a printing business which has R 10 000 – 00 working capital and an overdraft of R 20 000 – 00. You have one supplier (for all your paper, glue ink etc.) who only provides you with R 2 000 – 00 credit at a time. For this credit, like all the other credit facilities of your business, you stood personal surety for it in the event of non-payment. Furthermore, you have two main clients, client A and client B. Collectively, you receive 80% of your business from them.
The Risk of providing credit
On a cool Monday morning, your business receives a huge order from a first-time customer, called client C. The material required for the order amounts to R 50 000 – 00. You, however, stand to make a profit of R 100 000 – 00. Your current working capital and overdraft will only provide you with R 30 000 – 00 to purchase stock for the order of client C. You, therefore, require another R 20 000 – 00. You don’t want to ask the new client for a deposit to avoid sounding small. Client C has a lovely website, so you decided not to do a credit check on them. You, therefore, decided to provide an unknown business with R 50 000 – 00 credit, for which you may personally be held liable for.
You go to your old friend, the bank manager. He says they’ll give you an R 20 000 – 00 loan (of course with an unreasonable interest rate). They, however, want you to stand personal surety for that amount. You again don’t want to sound unconfident about your business capabilities and sign personal surety using your home as collateral. You receive the money and start working on the new order for client C. While working on the order, you cannot give that personalised attention to client A, and they decide to close their account. There goes 40 % of your business revenue.
“Big Client” is not paying
You completed your work for client C and delivered the product and submitted your invoice. You don’t hear from client C again. Days go by and they do not pay. Telephone calls, emails, even visits to their offices are useless. You want to go to a lawyer but they want an upfront deposit which you do not have. You cannot repay the R 20 000 – 00 bank loan and the bank issues summons against you and your business. There is no money to defend the case and the bank obtains a writ of execution against your home. You and your family are then without a home.
Due to losing client A as a client, you now forced to sell a printing machine at a reduced fee to pay your staff. Soon you cannot pay any of your staff and your business running expenses. You service your existing clients from the credit provided by your supplier which is very limited (R 2 000 – 00) and you have to turn away a lot of reasonable size work due to a lack of cash flow and equipment.
After sending an invoice to client B, he holds payment claiming bad product delivery as an excuse, which caused him the loss of clients. Your supplier is demanding payment for his outstanding invoice and seizes to provide any goods to you. You are left without a supplier and cannot service any new clients. After a week, your supplier sues you for his outstanding invoice of R 2 000 – 00.
Your business closing
There is no money to pay any of your running expenses. The next week, your landlord, telephone provider, and other service providers issues summons against your business and you as surety. All your staff left you and took you to the CCMA. That same week, client B sues you for the loss of business he suffered due to the bad product you provided him with. He still did not pay you for the money he owes you but obtained a judgment against you by default. The next week your business gets served with court documents for liquidation from the bank. The following day you get served with an application for your sequestration.
What would our ligation risk assessment identity?
The above example might sound extreme, but it is a potential reality. It could have been avoided if a proper a Litigation Risk Assessment has taken place for your business, and the report provided by us followed through. In this way, you and your business would have been advised of your current potential risks and how to minimize them.
- What are the business mistakes made in the scenario above?
- Had you done the following, the litigation risk would have been minimised:
- Do a credit check on company C and its directors before providing it with any form of credit? The credit check would however not be enough, but would give some indication as to the creditworthiness of company C and its directors;
- Obtain a complete deposit for all material to be used for the services, as well as 50 % of the labour costs;
- Have the directors of client C sign personal surety in favour of your company, for the debts of client C;
- Payment of the balance (50% of the labour costs) is to be paid on delivery of the goods;
- Have a well-drafted legal document incorporating the above processes. Therefore, you should have a surety document, as well as well-drafted terms and conditions in place.
How would a Litigation Risk Assessment Help
Should the above have been in place when you took on the job from client C, the risk of litigation would have been minimised. Client C may decide not to make use of your services, should you request a deposit, but why should you take that risk? Why can’t they take the risk?
We however only looked at one aspect of your business, that is, how to engage with new clients. A proper litigation risk assessment would look at staff contracts, as well as supplier agreements, to mention a few.
Feel free to contact us to discuss this product further and how you can use it for you and your business.
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