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.
Insolvency applications or petitions are filed when an entity is not able to pay debts accrued from operational creditors such as their suppliers, vendors, and financial creditors such as banks and NBFCs. In India, the insolvency procedure is governed by the Insolvency and Bankruptcy Code of 2013. Insolvency petitions can be filed at the district court where the entity lives or conducts business, which may then be transferred to concerned tribunals such as the NCLT. Insolvency applications can also be filed by creditors such as banks and lenders against a party.
If the litigation data shows insolvency petitions filed by or against your vendor, you should reassess your relationship with the third party.
Liquidation is the process of dissolving a company during which the assets of the company are sold and paid to the owners and creditors.
If you see liquidation orders against your target entity, it means that the company is insolvent and defunct and is a risky venture.
You should also note that there are various other indicators that you can use to determine whether the third party is a risky one. For instance, you can check if the third party has been involved in fraud, cheating, or criminal cases. The most common criminal activities include money laundering, fraud, drug trafficking, human trafficking, extortion, murder, etc.
If you notice lots of criminal litigation cases being filed against a third party, it’s a clear indicator that the party is embroiled in criminal activity.
Labour related litigation
Labour-related litigation arises due to improper labour relations. Such disputes may involve employees, employers, unions, trade unions, workers compensation boards, insurance companies, etc.
Labour-related litigation is a crucial signal for understanding labour compliance issues that the entity has faced in the past.
Civil disputes are conflicts with customers on contracts, property disputes with landlords, and various other altercations that tell a lot about the third party. You should also watch out for civil disputes involving employees, as this indicates the possibility of an employee dispute.
Civil disputes are primarily about the private rights and obligations of the third party. Nevertheless, it’s an important determiner of the risks involved in entering into a business relationship with the party.
Litigation data is an invaluable source of information when conducting risk assessments and due diligence on your vendors and suppliers. The Govt. of India makes this data available for businesses to conduct the required verification on counterparties. Given today’s technology, you do not have to engage with a Law Firm or deploy a consultant to run these checks on an ongoing basis. Due diligence platforms like SignalX run deep checks on Litigation Data on any given target; all that is required is the party’s name.
Try SignalX today.