News Article

Legislation & Litigation

Business organisations urge Grayling to rethink anti-creditor legal funding plans

By CreditMan Tuesday, February 24, 2015

  • The Federation of Small Businesses, British Property Federation, Chartered Institute of Credit Management, ACCA, ICAEW, ICAS, and R3 all have concerns about government policy that will cost businesses and taxpayer £160m per year;
  • Decision on plans should be pushed back until after election to allow time for review.

Leading business organisations have written to Justice secretary Chris Grayling, urging a last minute re-think on legal funding rules that could cost creditors in insolvencies £160m per year, thereby benefitting badly behaved directors.

From April 2015, insolvency litigation will no longer be exempt from the Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act. This means, following a business failure, in many cases it will be almost impossible to fund legal action to reclaim money for creditors owed to them by directors or third parties.

The business organisations are calling on the Justice secretary to delay the exemption’s end until after the election to allow time for a proper review of the policy.

The letter has been signed by the Federation of Small Businesses, the British Property Federation, the Chartered Institute of Credit Management, the Association of Chartered Certified Accountants, ICAEW, ICAS, and R3, the insolvency trade body.

The letter follows:

  • An Early Day Motion signed by 60 MPs from the three major parties calling on the Government to review its decision to end the exemption;
  • Calls in the Lords for a review of the decision, which led to Business minister Baroness Neville-Rolfe promising to review the Government’s policy with the Ministry of Justice;
  • Research by the University of Wolverhampton that found the exemption allowed the pursuit of up to £300m per year of creditors’ money, including £70m owed to taxpayers. £160m a year is successfully returned to creditors.

Giles Frampton, R3 president, says: “The Government is running out of time to avoid damaging the fight against fraud and bad business practice.”

“The insolvency exemption puts creditors, including small businesses and the taxpayer, on a level playing field with those trying to keep the proceeds of their bad behaviour out of reach. It’s vital the Government thinks again. Without an exemption, creditors’ money will stay in the wrong hands.”

“The insolvency exemption is the only LASPO exemption that the Government has not agreed to review since it was granted in 2012. At the very least, the exemption should be temporarily extended to allow a review to take place.”

As well as insolvency litigation, mesothelioma and defamation cases were made exempt from the LASPO Act. The Ministry of Justice was recently ordered by the Court to review its decision to end the mesothelioma exemption.

John Allan, Federation of Small Businesses National Chairman says: “There are good reasons for insolvency litigation to remain exempt from the Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act. We are deeply concerned that if it is not, many of the smaller but complex cases taken by smaller firms will never see their day in court. This will dramatically reduce the amount of money returned to small business creditors, increase overall business risk, and unfairly harm smaller suppliers.”

Under current rules, a substantial proportion of the costs of insolvency litigation can be recovered from defendants in successful cases brought to return money to an insolvent estate and its creditors. Typically these cases arise because a business’ former director or a third party has acted negligently or even fraudulently to the detriment of the company. A significantly reduced ability to reclaim costs would mean that in most cases, no money would be available to fund the legal action because it was uneconomic to pursue and there would be no benefit to creditors.

Giles Frampton adds: “The LASPO Act is based on a review of legal costs by Lord Justice Jackson. Ironically, the insolvency litigation exemption achieves everything Jackson hoped the LASPO Act would achieve.”

“It protects the public interest by helping creditors and discouraging fraud; it protects public money by bringing funds back to taxpayers; and it keeps legal costs down by encouraging directors and third parties to settle early with creditors and avoid expensive legal proceedings.”

R3 is the trade body for Insolvency Professionals, and represents the UK’s Insolvency Practitioners.