29 October 2015Print This Post

IPs hit back at Jackson: ending LASPO exemption would create ‘windfall’ for third-party funders

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R3: “ordinary creditors and the public” have gained most from exemption

Abolishing the exemption from LASPO for insolvency cases would create a “windfall” for third-party funders, insolvency trade body R3 has argued.

R3 was responding to a speech by Lord Justice Jackson earlier this month, who described the exemption as “an instrument of oppression, which is liable to crush defendants who have a good defence”.

Jackson LJ said the decision to introduce recoverability of success fees and insurance premiums in 2000 was a “windfall” for insolvency practitioners, and said that third-party funders were one potential way to support a case, at least for larger cases.

However, in a blog published on its website, R3 argued that it was creditors and the public who have enjoyed the ‘windfall’ benefit from the 2000 reforms – not the insolvency profession.

It said: “Using Lord Justice Jackson’s own argument, should the insolvency exemption end, the LASPO Act would create a ‘windfall’ for third party funders, who would represent the main way of funding cases. Third-party funders do not have public interest responsibilities, whereas insolvency practitioners do…

“Further, scrapping the insolvency exemption from the LASPO Act may not ‘fix’ Jackson’s uneven playing field problem. If the insolvency exemption is removed, only third-party funders would be available to back insolvency litigation (where funding from company assets is not available).

“The funders could also be perceived as having a ‘significant advantage’ over defendants in terms of having access to the funds needed to continue litigation long term. There could still be perception that defendants may need to settle early to avoid a long and costly dispute.”

R3 said that third-party funders “are a welcome part of the existing funding landscape”, but saying that 54% of cases involve claims under £50,000, noted Jackson LJ’s own acknowledgement that they were unlikely to support small cases.

R3 said Lord Justice Jackson’s arguments that HMRC was able to fund cases – “It is not a cash-strapped party which can only afford to litigate if the other side pays all of its costs in every case,” he said – did not reflect reality.

“Across the insolvency regime, HMRC’s resources are such that they are often unable to act as an active creditor in insolvencies and would be highly unlikely to fund cases if the exemption for insolvency litigation from the LASPO Act was to end.”

R3 said that while insolvency litigation “unexpectedly benefited from the 2000 reforms”, ordinary creditors and the public at large were the main beneficiaries rather than the ’Big Four’ accountancy firms and wider insolvency profession, as the judge had intimated.

“The 2000 reforms meant creditors – from small businesses to HMRC – received money back from rogue directors that they otherwise would not have done, while the public has benefited from the deterrent effect the reforms have created for would-be rogue directors.”

“Jackson’s argument that the insolvency profession operated ‘perfectly’ well before the 2000 reforms does not consider that the 2000 reforms allowed the profession to do something it could not before.

“The 2000 reforms enabled the insolvency profession to pursue creditors’ money that was previously inaccessible, by enabling assets to be returned to estates when there was no money in the estate to pay for litigation.

“Without an exemption from the LASPO Act, much of this money would be inaccessible again. Anecdotal evidence from insolvency practitioners suggests the number of cases being brought now that would not have been brought prior to 2000 is rising.”

R3 said that insolvency practitioners would typically use conditional fee agreements when they were dealing with no/low-asset cases.

“For example, a director may have loaned themselves company money then not paid it back. As there is no money in the insolvent estate, the insolvency practitioner (and creditors) cannot afford litigation to retrieve money from a director, associates of a bankrupt, or third party (possibly in another jurisdiction or tax haven) without being able to recover the costs of doing so.

“Consequently, without the insolvency exemption from the LASPO Act, insolvency practitioners and creditors will struggle to retrieve assets wrongly taken from insolvent estates: directors, associates of bankrupts, and others can essentially act with impunity, knowing they can keep assets and money from their creditors without the threat of being litigated against. This is not a level playing field.

“The current regime ensures that not only are directors, bankrupts or third parties deterred from withholding money from creditors, creditors do not have to pay money directly to retrieve what is rightfully theirs.”

By Nick Hilborne

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