Governance Failures That Lead to Litigation
Most governance failures don’t start with a dramatic moment. They start quietly — a missed warning sign, a risk report that doesn’t get the attention it deserves, a conversation that should have been escalated but wasn’t. Over time, these small gaps compound. And when pressure hits — a financial shock, a dispute, a regulatory inquiry — those gaps become the foundation of litigation.
When things unravel, the story is almost always the same:
“The board should have known. The board should have acted sooner.”
Litigation then works backwards, reconstructing what the board saw, what it didn’t, and how it responded.
When the board doesn’t get the full picture
One of the most common governance failures is simply not having the right information at the right time. It’s rarely intentional. It’s usually the product of:
management softening bad news
fragmented reporting
financial information that’s technically correct but not decision‑ready
risk issues that appear in multiple places but never land as a single, coherent message
When a dispute arises, plaintiffs map these blind spots and argue the board didn’t have enough visibility to make informed decisions — or worse, that it didn’t ask the right questions.
Issues that never quite make it to the boardroom
Another pattern we see is risk that sits in the organisation but never properly escalates. It might be:
a compliance issue that keeps resurfacing
a cyber incident that’s treated as an IT problem
a major contract that’s drifting off course
a regulator raising concerns informally
Individually, these issues look manageable. Together, they tell a story of a board that wasn’t given the full picture — and litigation often focuses on why those issues weren’t escalated earlier.
Governance that looks good on paper but not in practice
Many organisations have the right structures — committees, charters, policies — but the real test is how they operate under pressure. Litigation often exposes gaps such as:
committees that meet but don’t challenge
papers that arrive late or lack analysis
decisions made informally and later “noted” in minutes
risk frameworks that don’t influence actual behaviour
Courts and insolvency practitioners don’t care what the governance framework says. They care how it worked.
When the external story doesn’t match the internal reality
A major source of litigation is the gap between what the board knows and what the company says publicly. This can lead to claims of misleading or deceptive conduct, shareholder disputes and regulatory action.
The red flags usually include:
optimistic statements that don’t reflect internal concerns
forward‑looking claims without a solid basis
inconsistent messaging between management and the board
disclosures that are technically accurate but incomplete
This is where governance and litigation intersect most sharply.
Not shifting gears when financial pressure intensifies
When a company enters the zone of insolvency, governance needs to change. The board can’t operate on “business as usual” settings. Litigation often arises where boards:
continue trading without understanding solvency
enter into contracts late in the deterioration curve
pay some creditors but not others without a clear strategy
delay seeking independent restructuring or insolvency advice
In hindsight, plaintiffs argue the board didn’t adapt to the reality of distress — and that failure becomes the basis of claims.
No clear record of why decisions were made
When disputes arise, the question is rarely just what the board did. It’s why it did it — and whether that reasoning is documented.
Common issues include:
minutes that record outcomes but not thinking
advice obtained but not reflected in decisions
informal decisions never properly captured
gaps in the record that allow plaintiffs to create their own narrative
A thin record is often interpreted as thin governance.
Questions boards can use in real time
To make this practical, here are questions that help directors avoid the patterns that lead to litigation:
Are we getting unfiltered, timely reporting on the issues that matter?
Have we seen this risk before — and if so, how has our response changed?
Who owns this issue, and how do they report directly to us?
Would a court see a gap between what we know and what we’re saying publicly?
If we’re in or near the zone of insolvency, how has our process changed?
If this decision is reviewed in three years, will the record show we understood the risk?
How We Can Assist
Governance failures often become visible only when a dispute escalates or financial pressure intensifies. We help directors, shareholders, creditors and insolvency practitioners navigate these issues with clarity and discipline — strengthening governance in periods of pressure and responding when decisions are challenged in litigation or insolvency processes.
Our work spans commercial litigation, shareholder and director disputes, misleading or deceptive conduct claims, urgent applications, and the full range of insolvency‑related disputes, including unfair preferences, voidable transactions and director‑related dealings.
Explore our related areas of practice:
Commercial Litigation
Shareholder & Director Disputes
Misleading or Deceptive Conduct
Urgent Applications & Injunctions
Insolvency‑Related Disputes
Disclaimer
This publication provides general information only and may not reflect the most recent legal developments. It is not legal advice and should not be relied upon as such. You should obtain specific advice tailored to your circumstances before taking or refraining from any action.