BusinessBusiness RecoveryHope for IPs on legal reforms is just a flash in the pan

Hope for IPs on legal reforms is just a flash in the pan

Although the latest evidence on reforms to litigation funding seems to exempt the insolvency profession, the industry is not out of the woods yet, warns Kristy Zander

GOVERNMENT CHANGES to reform no-win no-fee funding seems to have exempt IPs. However, this could just be a temporary fix and the profession should still be on alert that the argument over their exemption is not over.

Following the far-reaching report by Lord Jackson into civil litigation and costs, the government has enacted legislation affecting the recoverability of conditional fee arrangement success fees and after-the-event insurance premiums. When the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO Act”) comes into force in April 2013, it will change the face of litigation funding.

The Act is of particular concern to the insolvency community, who rely on success fee arrangements and insurance deals as well as other creative funding measures to enable them to conduct litigation by keeping case costs down and thereby enhancing creditor returns. Without those measures, IPs would be largely reliant on creditor and third parties to fund cases, leaving them, in many circumstances, unable to pursue a claim.

However, after much lobbying by industry groups, the government announced in May 2012 that the relevant provisions of the Act would not come into effect in respect of ‘insolvency proceedings’ until April 2015. At the time, the parliamentary under secretary of state for justice said the economic benefits of insolvency cases “merit a delayed implementation to allow time for those involved to adjust and implement such alternative arrangements as they consider will allow these cases to continue to be pursued”.

The secretary of state has now made the order, giving effect to that announcement by way of the LASPO order, which contains a saving provision dealing with the recoverability of success fees and insurance premiums.

It clarifies that the exemption applies to all proceedings brought by a liquidator, trustee in bankruptcy or administrator or by a company in liquidation or administration. A welcome addition compared to the use of the more imprecise phrase ‘insolvency proceedings’. However, surprisingly, the LASPO order does not anywhere indicate that the saving provision is merely a delayed implementation rather than an exemption and does not mention the April 2015 deadline at all. On its face, the LASPO order grants a blanket exemption to insolvency practitioners, without any suggestion that it is merely a stay of execution.

Nevertheless, insolvency practitioners should not breathe a sigh of relief just yet. There is no indication from the government that it is reversing its earlier statement that the exemption will last only until April 2015. If the government has changed its mind and the exemption is now to be permanent, one would expect this to have been announced. However, as recently as November 2012, the Ministry of Justice continued to publicly state that implementation of the LASPO Act in relation to insolvency proceedings was delayed until April 2015. No doubt those in the industry will continue to do their utmost to convince the government that the exemption should be permanent. The fact that the LASPO order does not mention a deadline for implementation might make that task a little easier.

Kristy Zander is a restructuring and insolvency partner at Mayer Brown International 

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