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.
