IPs and government on collision course over litigation exemption

INSOLVENCY PROFESSIONALS are on a collision course with the government over plans to end insolvency litigation’s exemption from a 2012 crackdown on the way no-win-no-fee legal cases are funded.

The two-year exemption, granted to the profession following a far-reaching report by Lord Jackson into civil litigation and costs, is set to expire in April and has reignited the long-running dispute between practitioners and policymakers around the legal costs associated with fighting cases on behalf of creditors.

The decision to end practitioners’ temporary exemption from the Legal Aid, Sentencing and Punishment of Offenders Act has sparked fears that the change will damage creditors, including the taxpayer and businesses, as well as the public interest by deterring IPs from pursuing errant directors who have run off with company funds.

An early day motion was tabled in parliament earlier this month calling on the government to review the legislation before it comes into force in April 2015. It cites concerns that millions of pounds owed to businesses and the taxpayer each year could remain with directors or third parties that have wrongly, negligently or fraudulently taken money out of a business as a result of the Act.

“If the government presses on, bad behaviour by directors will be harder to reverse and up to £160m of creditors’ money will stay in the wrong hands every year,” says Giles Frampton, president at R3, the insolvency trade body.

No brainer

Lord Jackson’s reforms are an attempt to tackle legal costs that are disproportionate to the value of claims and prevent lawyers from cherry picking only the strongest claims. Under the reforms, conditional fee arrangements – agreements between a lawyer and client where the lawyer receives payment of their fees only if the action is successful – and after-the-event insurance premiums are to be paid out of any damages awarded, thereby reducing the amount returned to creditors.

IPs were granted an exemption on the understanding that insolvency litigation differs from civil litigation in a number of important ways; chiefly that it is in the public interest and claims brought are not frivolous nor do they have disproportionate costs.

Indeed, empirical research byp rofessor Peter Walton suggests that under the proposed changes IPs will lose the implied threat of CFA-funded litigation, which will make settlements harder to achieve as claims will be more likely to be dragged out at a higher cost to creditors.

IPs rely on success fee arrangements and insurance deals as well as other creative funding arrangements in order to keep case costs down and improve creditor returns. Without these measures, they would be reliant on creditor and third parties to fund cases. In many cases, they would be left unable to pursue a claim, says Tony Murphy, director at insolvency firm Harrisons.

“If it is more speculative you will be dissuaded from pursuing the case, the other side will be happy to defend it,” he says. “The problem is that in most insolvencies there isn’t any cash.”

According to Frampton, MPs described maintaining the exemption as a ‘no-brainer’. “We would encourage every MP with concerns about director misconduct and fair play for small businesses and taxpayers to sign it,” he says. “With the exemption coming to an end in April, parliament and government are running out of time to prevent misbehaving directors from benefitting at everyone else’s expense.”

Viable alternatives

A separate amendment has been tabled in the House of Lords to make insolvency litigation permanently exempt, while academic research shows the exemption allows insolvency practitioners to pursue negligent and fraudulent directors for up to £70m owed to HMRC every year.

Nevertheless, the likelihood on any change in stance from the government appears bleak. “Our changes to no-win-no-fee deals have tackled the soaring costs of court cases which, among other things, have driven up insurance premiums at a cost to individuals and businesses, Justice Minister Lord Faulks tells Accountancy Age.

“We delayed bringing the law in for insolvency proceedings to allow the industry time to adjust. Not all insolvency practitioners use no win no fee arrangements, but experience in other areas where our reforms apply shows that practitioners can adapt,” he says.

However, professor Walton’s research contends that there are no “viable alternatives’ to the current insolvency litigation regime which are capable of achieving the same level of return to creditors.

“The reason for the temporary exemption was that the government said ‘look, we recognise there are differences’ but they would give a period of a couple of years for insolvency professionals to find an alternative arrangement. There are no alternative arrangements that are going to work,” explains Robin Henry, a partner with Collyer Bristow’s financial disputes team.

“I don’t think it was realistic in first place to suggest alternatives. It has just been thrown out there by the government.”