Alternative Dispute Resolution and its uses in insolvency

Alternative Dispute Resolution (ADR) is the overarching name given to the different processes used to determine disputes between parties out with a formal court process. ADR is becoming more popular, but is not as widely used by insolvency practitioners (IPs) in the UK to resolve disputes arising from an insolvency event as it perhaps should be. Given the duty of IPs to maximise the return to creditors and to deal with insolvency proceedings efficiently, ADR does represent an attractive alternative to costly and time consuming litigation through judicial systems that are still recovering from the delays and disruptions caused by the COVID-19 pandemic.

There are four main types of ADR that could be applied to insolvency disputes, these are:

• Mediation: a voluntary process whereby parties meet to discuss and attempt to negotiate a resolution to a dispute between them with the assistance of a neutral third party known as a mediator. Mediation does not bind parties to reach a negotiated a settlement and is confidential.
• Arbitration: a process in which an independent third party determines how a dispute is to be resolved. A determination of an arbiter is binding on parties and can be enforced through the courts, if required. Arbitration is generally quicker and more flexible than a court action.
• Expert determination: a process is which an independent expert is appointed to determine a dispute between parties. The process is generally used for technical disputes such as those involving complex IT matters, in which it is of benefit to have the party determining matters to have existing specific and relevant knowledge of the subject matter in dispute. The process is generally quick and binding on parties.
• Adjudication: This process is similar to expert determination in that a 'man of skill' will determine the dispute between the parties. It is popular in the construction industry as it is quick and can be used to obtain interim decisions to enable projects to advance; albeit the adjudication can be overturned by the courts.

The pros of mediation

In an insolvency context, the most appropriate and popular form of ADR is normally mediation. There are several reasons for this. The most prominent being that mediation is a confidential, flexible, quick, low cost and low risk process. It does not bind the insolvency practitioner to a rigid process and generally results in a commercial outcome, rather than a fight about who is correct in law.

Insolvency disputes are often costly and can potentially be quite risky for an insolvency practitioner to prosecute through the courts. There are a number of reasons for this. For example, the insolvency practitioner may have limited books and records or there may be limited factual witnesses who are able to help establish the IPs case. Often the interplay between insolvency law and other areas of law is not straightforward, which means that novel issues arise, and can increase the cost of the litigation. For these reasons you can see why ADR might be attractive.

The most obvious advantages to mediation over litigation or other forms of ADR are:

• The flexibility and speed of the process. A mediation can be arranged and completed in a matter of weeks and the process is entirely driven by the parties as opposed to a judge or arbiter; meaning parties can time and structure discussions to suit their specific needs;
• Unlike other forms of ADR or litigation, in agreeing to mediate it signals a willingness by both sides to reach a compromise, which generally improves the prospects of reaching a negotiated settlement; and
• Mediation allows parties to save face by resolving a dispute without necessarily having to admit any wrongdoing or error.

The cons of mediation

Mediation does however, have certain disadvantages which flow directly from the flexibility and non-binding nature of the process.

• The most obvious is that parties are not bound to reach an agreement during mediation and so the entire process can be vetoed by one party resulting in wasted time and costs; and
• There is also the issue of disclosure to contend with; unlike in an arbitration or litigation, it is not possible to compel the other side to disclose all relevant information in advance of a mediation: which may be critical to, for example, correctly ascertaining the prospects of success in a wrongful trading action.

Overall, mediation is well suited to the types of disputes insolvency practitioners have to deal with on a regular basis. Take, for example, a dispute in respect of the repayment of a director's loan account in which it is unclear what items of expenditure are personal and which items are legitimate company expenses. Mediation is perfectly suited to compressing and expediting a negotiated settlement of such issues quicker and cheaper than a court action, and without the associated risk of adverse costs being awarded (against the insolvency practitioner).

The fact you can get a cheaper and faster resolution to a dispute through mediation is the main driver for it becoming more popular in resolving insolvency disputes.

The tool of choice for pandemic-related insolvencies?

As with a lot of trends, the US is leading on the use of insolvency mediation. Following the collapse of Lehman Brothers into Chapter 11 proceedings, mediation was used very effectively to enable Lehman Brothers to collect debts and repay creditors at an improved rate. This has given UK insolvency practitioners confidence that mediation can be used for complex restructuring proceedings and we think it will be a tool of choice for those practitioners tasked with dealing with the insolvencies resulting from the pandemic.

Mediation may not be suited to all insolvency disputes, indeed if the other side is entrenched or not open to negotiation then mediation will not work; however, as John F Kennedy said in his inauguration speech "Let us never negotiate out of fear. But never fear to negotiate."