Insolvency Litigation Reforms gives green light to rogue directors

The latest round of litigation reforms will in effect abolish the recoverability of legal success fees (CFAs) and after-the-event insurance (ATE) from losing defendants. The knock on effects will effect both creditors and the HMRC.

The Ministry of Justice announced that it is scrapping an exemption for insolvency litigation from the 2012 changes on the way no-win-no-fee legal cases are funded as determined by the 2012 Legal Aid, Sentencing and Punishment of Offenders Act (LASPO 2012). An exemption for two years had originally been granted to Insolvency cases due to their differing nature from commercial litigation and that they benefitted the wider business community.

Creditors have increasingly used CFAs and ATEs to fund legal claims against rogue firms that go out of business often leaving great debts in their wake.

In addition to leaving creditors with no way of getting their money back further criticism has warned that the move will also prevent the HMRC from recouping unpaid taxes.

The ideology behind the original reforms believes these funding methods have prompted an increase in claims, especially in personal injury cases.

In a move designed to stop such cases, Lord Justice Jackson introduced new rules which transfer the bulk of legal costs on to claimants, without a chance of recovery from rogue directors or companies.

After lobbying  from Insolvency Practitioners and the R3 trade body, the Association of Business Recovery Professionals, the Government agreed a two-year exemption for insolvency cases after it was argued it differed from other commercial litigation in that it is brought for the benefit of all creditors, including the Government itself, rather than one party.

Phillip Sykes, president of R3, said: “The Government is potentially writing off hundreds of millions of pounds per year that’s owed not just to HMRC, but to hundreds, if not thousands, of ordinary honest businesses as well.

“The only winners are the rogue directors and others who refuse to repay money owed to creditors after an insolvency. We’re back to an uneven playing field, where rogue directors hold all the cards – and the cash.”

Mr Sykes criticised the Government for failing to answer or engage with the arguments and accused ministers of not carrying out an impact assessment to see what effect the move would have. “The end of the exemption leaves a huge funding black hole for insolvency litigation. This is a blow to the wider business community and the insolvency profession,” he said.