Eleventh-Hour Reprieve

28th April 2015

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Despite the government's decision to exempt insolvency litigation within LASPO, it would be premature for practitioners to relax just yet.

The insolvency profession has breathed a collective sigh of relief as the government has, at the eleventh hour, extended the carve-out that insolvency proceedings currently enjoy from certain aspects of the Jackson reforms.

"Insolvencies with little or no funds “in the pot” on day one have long been a feature of the landscape."

Insolvencies with little or no funds “in the pot” on day one have long been a feature of the landscape. Before the advent of the Conditional Fee Agreement (CFA), office-holders wishing to pursue litigation typically dealt with this by waiting for an asset realisation before proceeding or seeking funding from creditors to bring the claim.

CFAs backed up by after-the-event (ATE) insurance policies provided a valuable tool, allowing office-holders to share the risk of an unsuccessful claim with their professional advisers and pursue claims that could not otherwise be funded. This improved access to justice, particularly in cases where, say, a company’s directors had ensured that no assets remained to provide the liquidator with a fighting fund.

The Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act 2012 ended the recoverability of CFA success fees and ATE premiums for most new claims from April 2013. While the aim of LASPO to keep a tighter rein on litigation costs is obviously sensible, the effect of these provisions risked stifling good claims.

Most insolvency litigation aims to increase the funds available to be distributed among the unsecured creditors of the insolvent. The target of those claims is often a company’s former directors, whose actions in the period leading up to the insolvency may have contributed to the company’s predicament, worsened the overall position, or even caused the company to fail.

The Insolvency Act 1986 allows such directors to be pursued for misfeasance, wrongful trading or fraudulent trading, and the court to order them to compensate the company accordingly. In other cases an insolvent company or individual may have transferred assets to a third party at an undervalue, or paid associates ahead of other creditors. The same legislation provides a mechanism for office-holders to unwind these transactions and level the playing field.

These powers however are worthless unless they can be used, and where success fees and ATE insurance premiums cannot be recovered from the other side, the risks of bringing even strong claims may be higher than can be justified in the best interests of creditors.
Acting on the basis of a CFA with no fee uplift is unlikely to appeal to many solicitors, leaving office-holders to decide whether to walk away from a good claim or enter into a CFA knowing that the uplift will have to be borne by the insolvent estate.

There may be room within the office-holder / solicitor relationship for a discussion about an equitable division of any realisation between solicitors’ costs and the estate: the same however cannot be assumed in relation to the premium for an ATE policy, yet an office-holder bringing a claim without one runs the risk of an application for security for costs.

Where office-holders are unable to bring claims against delinquent directors and others who have profited at the expense of a company and its creditors, those creditors lose out – to the tune of £160 million a year according to R3, the insolvency professional organisation. When all that an unscrupulous director needs to do to avoid misfeasance proceedings is to make a good enough job of asset-stripping the company before putting it into liquidation, then we all lose out.

Justice Minister Shailesh Vara’s statement that the insolvency carve-out of section 44 and 46 of LASPO will continue “for the time being” has therefore been enthusiastically welcomed by various interested parties including the British Property Federation, the Federation of Small Businesses, the ICAEW and R3.

It is important to note however that this is not a permanent solution to the problems posed to the profession by LASPO. Implementation was originally delayed to give insolvency practitioners and other interested parties “time to prepare for and adapt to the changes”, and the minister’s statement says only that the Government now agrees that more time is needed, not that the carve-out should be permanent.

In the absence of a workable alternative to the current regime it would be premature for us to relax just yet. We can expect further details later in the year.

This article first appearend in the Solicitor's Journal.

RELATED:  INSOLVENCY & CORPORATE RECOVERY >>DISPUTE RESOLUTION >> SOLICITOR'S JOURNAL>>


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Ruth Thurland

RUTH THURLAND

Senior Associate, Nottingham

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