Most insolvency practitioners and lawyers believe the end of the exemption for insolvency litigation from the abolition of recoverable success fees and insurance premiums in conditional fee cases will lead to “unscrupulous or illegal behaviour” by company directors, a survey has found.
Three in ten predicted that, as a result of the change, over 40% of claims would not proceed because of lack of funding.
The survey, by commercial data specialists Encompass Corporation, follows the end in April this year of the exemption of insolvency from LASPO, a move strongly resisted by the insolvency industry.
All of the 38 professionals who responded to the survey, including 19 insolvency practitioners and 14 lawyers, said they believed the change would reduce the number of claims.
A large majority, 32, said small businesses were “at greatest risk” from the move. A similar proportion advised businesses and individuals to take more care when entering into contracts.
Wayne Johnson, founder and chief executive of Encompass, said: “This change in the law may make pursuit of a claim too costly for creditors owed money by a company with assets of value but made insolvent by its directors.
“Our advice is to employ a lawyer or other professional before entering into new contracts and request that they thoroughly check the counterparty and establish whether any director has a history of involvement with repeatedly failing companies”.
R3, the representative body for insolvency professionals, fought hard last year to have the insolvency exemption made permanent, enlisting the support of other groups, such as the Institute of Chartered Accountants in England and Wales, the Bar Council, the Insolvency Practitioners Association, and the Federation of Small Businesses.
Phillip Sykes, president of R3, reacted angrily to the government’s decision, announced by Lord Faulks to Parliament in December, to end the exemption.
He warned: “The government is potentially writing off hundreds of millions of pounds per year owed to not just HMRC, but to hundreds, if not thousands, of ordinary honest businesses as well.”
However, Lord Justice Jackson has described recoverability in insolvency cases as “an instrument of oppression, which is liable to crush defendants who have a good defence”.