Lord Justice Jackson has called for the recently extended exemption for insolvency cases from the impact of his reforms to come to an end, describing recoverability as “an instrument of oppression, which is liable to crush defendants who have a good defence”.
“There was much wisdom in the minister’s announcement on 24 May 2012 that the government would end the exemption for insolvency litigation in [April] 2015,” he said in the Mustill Lecture in Leeds last week.
“Perhaps the government should do what it said it would do.”
Following intensive lobbying by business groups, led by insolvency trade body R3, in February justice minister Shailesh Vara said the government would delay the end of recoverability of success fees and after-the-event insurance premiums “for the time being”.
Jackson LJ gave four reasons for ending the exemption. First, the introduction of recoverability was aimed at filling the void left by cutting legal aid, mainly in personal injury cases. “The problem with the reforms in April 2000 was that all sorts of people (whom the reforms were never intended to benefit) gained huge windfalls,” he said, including insolvency practitioners (IPs).
“When Parliament scaled back legal aid and introduced recoverability in its place, it was not endeavouring to assist the ‘Big Four’ [accountants] in pursuing insolvency claims. IPs were managing perfectly satisfactorily throughout the twentieth century. In strong cases IPs were willing to carry the costs of litigation as work in progress on their balance sheets. Then they got a pay-out at the end, if the action was successful. That encouraged responsible litigation. IPs gained a windfall from the 2000 reforms.”
Secondly, Jackson LJ referred to what was described in the Supreme Court in Coventry v Lawrence as “the ‘blackmail’ or ‘chilling effect’ of the [recoverability] regime which drove parties to settle early despite good prospects of a defence” – or what he himself described in the speech as an “instrument of oppression”.
He said: “Obviously those ex-directors who have been guilty of misconduct should pay up. But not every defendant is liable… It is quite wrong that those ex-directors who have not been guilty of misconduct should be crushed into paying up. In addition to their financial loss they also suffer the stigma of conceding liability for that which they did not do.”
Third, recoverability drove up the overall costs of litigation “substantially”, Jackson LJ said, and the exemption did not provide an incentive to control costs. Finally, “it is perfectly possible to bring insolvency litigation without the benefit of recoverability”.
In making his case, Jackson LJ drew repeatedly on the report of Professor Peter Walton that was commissioned by R3 to show why the exemption should continue and played an important role in the lobbying.
The judge argued that the report actually helped make his arguments, and cast doubt on its finding that ending the exemption would leave creditors more than £160m out of pocket. “With the greatest respect to the professor, his report simply does not support that proposition.”
He also raised the question – without providing an answer – of whether continuing the exemption is contrary to the European Convention on Human Rights by giving insolvency claimants special status.