Insolvency profession wins battle against legal cost reforms

The insolvency profession may have won a long-running battle to keep down the legal costs of fighting cases on behalf of creditors.

When IPs successfully win claims on behalf of creditors, their lawyers’ success fee and insurance costs can be passed on to the losing party.

But the government’s crackdown on no-win no-fee cases would have seen the IPs pick up the legal and insurance costs on winning cases, resulting in a smaller payout to creditors.

The issue has ebbed and flowed, with the government initially excluding the insolvency profession from any no-win no-fee changes. But it then withdrew the exemption. Last year, it back-tracked on that stance and claimed an exemption would apply to the profession but only for two years.

In the just-released legislation, a provision claims that liquidators, trustees in bankruptcy and administrators will be exempt from a clampdown on these types of litigation funding – crucially with no time limit to the exemption.

Insolvency trade body R3 council member Frances Coulson (pictured), also a partner at law firm Moon Beever, said: “R3 is pleased to see the exemption for liquidators, administrators and trustees in bankruptcy from the changes to the legislation, which we understood to be for an initial period of two years while discussions took place on what regime should be applied to litigation by office holders in the long term.

“We hope that the fact that the legislation as drafted does not have a specific time limit means that the government is considering treating litigation by insolvency practitioners as a permanent exception from the provisions.

“The exemption allows insolvency practitioners to pursue errant directors who have run off with company funds or, in serious cases, committed fraud. This costs the business community and the taxpayer hundreds of millions of pounds each year. Directors who act improperly and strip value out of businesses should not be allowed to benefit at the expense of legitimate business.”

The changes to legislation come after a government-commissioned Jackson Report was published and included plans to abolish conditional fee arrangements (CFAs), better known as no-win no-fee deals, as part of changes to the Legal Aid, Sentencing and Punishment of Offender Bill.

Due to the estimated added cost of taking an insolvency case to court, practitioners were left having to choose their legal battles carefully on whether to pursue fraudulent company directors to recover greater funds for creditors.

Currently, insolvency practitioners (IPs) pursuing funds through the courts receive, from the losing side, damages, legal costs, solicitors’ success fees and insurance costs if they win.

Last year, R3 looked at 23 insolvency cases which recovered £7.6m to creditors. Of the 23 cases, 13 practitioners said they would not have pursued the directors if the added costs had been in place.