Creditors face losing more than £150m per year if the exemption from the Jackson reforms for insolvency litigation ends as planned next April, according to an independent report commissioned by the insolvency profession.
However, the report also acknowledged that success fees and after-the-event insurance premiums are “rarely paid in full and often not paid at all” at the moment.
The Association of Business Recovery Specialists, known as R3, has launched a press and parliamentary campaign to call for a permanent exemption for insolvency litigation.
It commissioned Professor Peter Walton of the University of Wolverhampton to research and write the report, with the support of the Association of Chartered Certified Accountants, the Insolvency Practitioners Association, the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants Scotland, claims specialists JLT Specialty, solicitors Moon Beever, and accountants Moore Stephens.
R3 said that without the ability to recover costs fully, legal action to reclaim debts from directors would be unaffordable in most cases.
Using 2010 figures from the Insolvency Service and a survey of R3 members, the research estimated that insolvency litigation conducted under conditional fee agreements (CFAs) realises £150-160m a year. A majority of claims realise £50,000 or less, and it said practitioners believe such “relatively small” claims are generally unlikely to be pursued if the exemption comes to an end.
But it also admitted that “in reality, the CFA uplift (and ATE insurance premium) are rarely paid in full and often not paid at all (even where the insolvency litigation has been successful)”. But the report continued that nonetheless, “the existence of the risk to defendants of having to satisfy such claims, does concentrate their minds. The current system does encourage a large majority of claims to settle.
“The view of practitioners is that Jackson would lead to fewer cases being brought and of those that are brought, fewer would settle. Those that would still settle would settle for a lesser amount.”
This meant that “wrongdoers are more likely to ‘get away with it’, and further culpable behaviour will be encouraged”.
Phillip Sykes, deputy vice-president of R3, says: “Insolvency litigation is absolutely in the public interest, and it is absurd that the government is considering making it all but impossible for such cases to continue. The Jackson reforms were supposed to protect exactly this type of case.”
“The government’s only justification for ending the exemption is that it would make the Jackson reforms consistent across the board, regardless of the consequences. It’s just lazy thinking.”
The report argued that insolvency litigation differs from ordinary civil litigation in a number of ways that should continue to be recognised by the law.
“Insolvency litigation is in the public interest and claims brought are not frivolous nor do they have disproportionate costs. For example, when a public body is sued successfully public funds are reduced, yet when insolvency litigation is successful, it is often public funds that benefit, through returns from the insolvent estate to HMRC. Alternative funding, whilst available has a high acceptance threshold and a high cost.”
Further, it said disproportionate costs are not a problem in insolvency litigation.