8 Key Risk Indicators for all Litigation Checks
Litigation data is a crucial piece in determining the risks involved in dealing with a third party. Litigation checks are often overlooked when performing cursory due diligence but can be useful indicators of the business practices of an individual or a company. You can source litigation data from the Supreme Court, the High Courts, District Courts, and Tribunals to develop a quick overview. The Indian government has the data from 3000 legal bodies made available on the jurisdiction’s respective e-court websites.
There’s a wealth of insightful information you can obtain from litigation data in understanding the credibility of your vendors and suppliers. It’s crucial to look for key risk indicators that you can parse from the available data. Here are some of the most important signals in litigation data that you should look out for.
8 Key Risk Indicators you can identify using Litigation Data
Cheque bounce-related litigation
A cheque bounce is a criminal offense under Section 138 of the Negotiable Instruments Act, 1881. What’s worse is often a cheque bounce happens with the criminal intent to defraud another party. It’s not to say every cheque bounce is deliberate, but it’s not unusual to come across third parties, vendors, suppliers who deliberately maintain a balance so low that their cheques are not cleared. This is why you need to be vigilant about this trend and look out for such previous litigations.
More than 35 lakh cheque-bounce cases were pending, constituting more than 15 percent of the total criminal cases pending in district courts.
Apparently, cheque bounce cases are a real menace. As per a study in 2021, more than 35 lakh cheque-bounce cases were pending, constituting more than 15 percent of the total criminal cases pending in district courts.
A history of cheque bounce is an indicator of delinquent behavior. Delinquent behavior may manifest itself as non-payment of dues or failure to pay on time. If you see many litigations filed against a third party related to cheque bounces, it may indicate that the party is a habitual defaulter. And that should immediately raise a red flag.
Tax disputes with tax authorities
Tax disputes are disagreements between the taxpayer and the tax authority. Disputes may arise regarding tax payments, tax calculation, non-compliance, or violation of any type of tax obligation. Tax disputes are usually resolved through negotiations or by filing a lawsuit.
Individuals and businesses are obligated to pay their respective taxes. Under the Income Tax Act 1961, Central Excise Act 1944, Customs Act 1962, and Good & Service Tax Law, any kind of tax evasion and tax avoidance is a criminal offense.
Some examples of tax evasion and other criminal tax offenses are:
* Undisclosed income detected in search and seizure operations.
* The removal, concealment, transfer, or delivery of property to thwart tax recovery.
* The failure to pay the treasury taxes withheld.
* Wilful attempts to evade payment of any tax.
* Making false statements or accounts.
* Smuggling of goods.
* Clandestine removal of manufactured goods.
* The collection and retention of service tax (VAT on services)
* Anti-profiteering under GST Law.
Source – Westlaw.com
If a third party or a small business’ name shows up in multiple tax-related litigations, it could indicate that there may be attempts to evade tax payments or the company may have poor controls and compliances in place. In particular, you should keep an eye on the following three types of defaults –
- Disputes with GST authorities on tax evasion and defaults
- Disputes with Income Tax authorities
- Disputes with Customs authorities
Debt recovery applications
The Debt Recovery Tribunal is a government body formed under the Recovery of Debts and Bankruptcy Act (RDB Act), 1993. Its function is to recover debts from individuals and businesses, payable to banks and financial institutions.
Debt recovery applications filed against a third party by creditors clearly indicate financial trouble. If you notice many such applications being filed against a third party, it may signal that the party is engaged in financial misappropriation and is potentially a high-risk entity.
4. Insolvency and Bankruptcy Proceedings
Cases filed under the Insolvency and Bankruptcy Code (IBC) are strong indicators of financial distress. Whether the entity is a corporate debtor, operational creditor, or personal guarantor, involvement in insolvency proceedings signals instability.
Key red flags include:
- Ongoing corporate insolvency resolution processes
- Repeated insolvency filings across group companies
- Liquidation orders or failed resolution attempts
Doing business with entities facing insolvency can expose you to supply disruptions, unpaid dues, and legal complications.
5. Criminal Proceedings for Fraud or Misrepresentation
Criminal cases involving cheating, fraud, forgery, or misrepresentation are among the most serious risk indicators. These cases often arise from intentional deception, falsified documents, or misappropriation of funds.
Such litigation suggests:
- Ethical lapses at management level
- High probability of contractual breaches
- Elevated reputational risk
Even if cases are pending, their nature and frequency should be closely evaluated before onboarding or continuing a relationship.
6. Labor and Employment Disputes
Frequent disputes with employees or labor unions can indicate systemic HR and governance issues. These may include cases related to unpaid wages, wrongful termination, non-payment of statutory benefits, or unsafe working conditions.
Patterns of labor litigation often reflect:
- Poor compliance with labor laws
- High employee attrition and dissatisfaction
- Risk of operational disruptions due to strikes or penalties
For suppliers and service providers, such issues can directly impact delivery timelines and quality.
7. Contractual and Commercial Disputes
Repeated civil suits related to breach of contract, non-performance, or payment disputes point to unreliable business conduct. While disputes are a part of commerce, excessive litigation suggests deeper problems.
Common warning signs include:
- Multiple cases filed by customers or partners
- Long-pending commercial suits
- Arbitration awards enforced through courts
These indicators suggest that the entity may not honour contractual obligations consistently.
8. Regulatory and Sector-Specific Violations
Litigation initiated by regulators or statutory bodiessuch as environmental authorities, sector regulators, or municipal corporations, can highlight operational non-compliance.
Examples include:
- Environmental clearance violations
- Safety and quality non-compliance
- Licensing or permit-related disputes
Such cases can result in shutdowns, penalties, or blacklisting, making the entity a risky long-term partner.
Conclusion
Litigation data is far more than a legal record it is a behavioral dataset that reveals how an individual or organization operates under pressure. Patterns of disputes, rather than isolated cases, provide valuable insight into financial discipline, compliance culture, and ethical standards.
By systematically analyzing litigation data across courts, tribunals, and regulatory bodies, businesses can:
- Identify hidden risks early
- Avoid unreliable or non-compliant partners
- Strengthen their overall due-diligence framework
Incorporating litigation analysis into third-party risk assessments is no longer optional it is essential for informed and resilient decision-making.
