Natasha Harrison's disputes forecast 2024: sponsors, restructuring and fraud take centre stage

The volume of corporate disputes is unlikely to subside in the year ahead, writes the founder of Pallas Partners
Portrait shot of Natasha Harrison

The disputes market will continue to boom in 2024

If 2023 proved a ‘perfect storm’ for the disputes market, then 2024 is set for yet another eventful year. The uptick in litigation and arbitration has been significant with corporates, investment funds and asset managers actively using litigation to either create value, mitigate risk or reduce losses. At the same time private equity houses and hedge funds are becoming more aggressive as the economic situation declines. The disputes market is once again booming.

Against this backdrop here are my top five trends to watch out for in 2024:

1. A further uptick in sponsor disputes

Difficult market conditions are creating a different dynamic for sponsors. In their search for yield, sponsors are seeking to maximise their own position at the expense of creditors and the underlying company itself. Increasingly, we’re seeing cases of sponsor-on-creditor violence, whereby sponsors seek an advantage by cramming down creditors through new money/amendments, or by effectively stripping the company of assets and running it dry until there’s no value left.

Additionally, challenges to ‘whitelists’ are long overdue. Increasingly prevalent, whitelists prevent financial institutions who are not listed from acquiring the debt in the secondary markets. In turn, this damages market liquidity and often results in a sponsor-friendly restructuring rather than a restructuring that is in the best interests of the company. As a result, this restrictive practice is fundamentally damaging to the effective operation of the financial markets.

2. There will be more litigation around ‘broken deals’

Now the market has digested the rush of M&A deals in 2020 and 2021, buyers’ remorse and other motivations will continue to lead an uptick in litigation around ‘broken deals’, arising not only from failed transactions but also from counterparties walking away from deals in breach of contract, choosing to proceed with a new partner who can provide more favourable terms. These re-trades are currently prevalent in the market, and are already leading to active litigation, both to recover losses but also to protect reputations.

3. Fraud-based litigation will continue to increase

The lack of supervision and protective measures, a legacy of lax covenants and the persistence of zombie companies will lead to more fraudulent activity being uncovered, particularly as corporates come under increased financial stress and the tide goes out. This will only increase with the economic downturn and the appointment of insolvency practitioners (IPs) and subsequent investigations.

The other side of the coin is the fallout from the recent private equity boom as once promising transactions fall apart. With the rapid acquisition of companies with little or no due diligence, purchasers are now coming to realise what they in fact bought or invested in has little or no bearing to what they now own. In order to avoid those deals, allegations of fraud are flying hard and fast – most often against the seller in order to undo the entirety of the contract and recover all ‘losses’. Again, with the increased pressures on the private equity sector and the financial markets more generally, disputes of this type are already becoming more commonplace.  

4. Restructuring disputes are only set to increase

Whilst we started to see an uptick in insolvency and restructuring matters in 2023, there are emerging signs that we’ll see a substantial increase in 2024. The Adler case is a clear example, with the challenge to the restructuring plan, currently awaiting judgment from the Court of Appeal. Disputed restructuring plans are only likely to increase, including in relation to issues around valuation, and where it is questionable that they are the best way to preserve value.  

Additionally, the increase in the appointment of IPs will also reveal what has really been going on inside the companies (including fraud), and will lead to further rounds of litigation as the insolvency administrators exercise their statutory powers in full, and seek to recover losses.  

5. Don’t rule out increased ESG-related litigation

Complex global supply chains are a fact of modern-day business, however, they’re not without risk for major brands and investors. The actions of subcontractors deep in the chain can cause real reputational risk, and as a result I think we will begin to see a rise in challenges, including in relation to prospectus liability. There is also a noticeable trend of regulators intensifying their involvement, with the introduction of policies like the EU’s CSDD (Corporate Sustainability Due Diligence), explicitly holding companies responsible for their actions from source to outcome.

As a result, we will keep seeing more not-for-profit organisations such as ClientEarth continue to use litigation as a tool to enforce accountability and drive behavioural change in the markets.

With no sign of the finance and corporate world returning to any sense of normality in the near future, I have no doubt that the international disputes market is once again set to have an even more active, contentious and unpredictable year ahead.

Natasha Harrison is founder and managing partner of London-based litigation and disputes specialist Pallas Partners.

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