News Article

Legislation & Litigation

Government recognises £160m cost of legal reforms to creditors in insolvencies

By CreditMan Thursday, December 18, 2014

The Government has recognised for the first time that creditors in insolvencies could lose up to £160m per year from next April as a result of the Legal Aid, Sentencing, and Punishment of Offenders Act (2012) (LASPO).

In response to a Parliamentary Question on the Act, insolvency minister Jo Swinson cited academic findings on the Act’s impact on creditors.

Business groups, including insolvency trade body R3, have long argued that the Act will make it harder to return money to creditors – including small businesses and the taxpayer – from directors and third parties after an insolvency.

The Act will have an impact on creditors in insolvencies from April 2015.

Giles Frampton, R3 president, says: “While the Department of Business, Innovation, and Skills has been making efforts to improve the position of creditors in insolvencies, the Ministry of Justice’s proposals contained in the LASPO Act will have the opposite effect.”

“It’s encouraging that at least part of government is now acknowledging that the reforms could hurt creditors. It’s not too late for the Ministry of Justice to think again about what it’s proposing.”

Giles Frampton adds: “What is particularly frustrating is that the Ministry of Justice has still failed to carry out a full impact assessment of the Act’s likely effect on insolvency, and appears to be ploughing on regardless. Insolvency litigation is very different to the types of legal case the Act was designed to tackle. In fact, insolvency litigation achieves everything the reforms were designed to protect.”

The LASPO Act prohibits litigants from reclaiming certain legal costs (after the event insurance premiums and conditional fee agreement uplifts) from losing defendants (the ‘Jackson’ reforms). In insolvent estates there are little or no funds to pursue actions against directors, bankrupts, or third parties so it is necessary to insure the office holder and to pay a contingent success fee to the lawyers because of the risk of losing. A prohibition on recovering these costs from the losing party would make many cases uneconomic to pursue.

Insolvency litigation was exempted from the Act until April 2015 to allow time for an alternative mechanism for funding insolvency cases to be found. However, creditors and the insolvency profession say no alternative funding mechanism would generate the same results for creditors.

Giles Frampton adds: “The Government’s assumption was that an alternative would be found by 2015 and so the Act would not hurt creditors. The same report which quantifies the loss to creditors of £160m per year clearly outlines that there is no alternative to the current, temporary exemption that would help creditors in the same way.”

In response to a question from Toby Perkins MP about the impact of the reforms on financial redress for creditors, Jo Swinson said:

“Insolvency trade body, R3, commissioned research to try to measure the impact of civil justice reforms on insolvency litigation. This research estimates that contingency fee arrangement backed insolvency litigation realises £150-160m per annum.”

“When the exemption for insolvency proceedings was introduced in 2013 the impact assessment made the assumption that by April 2015 alternative funding arrangements would have been developed for insolvency cases. On that basis it was assumed there would be no major impact on the volume of insolvency cases which were pursued, or on the value of assets recovered in the long-run, although the risk of recoveries falling was acknowledged.”

The LASPO Act has been subject to much criticism. The Government recently lost a judicial review of its handling of the decision to remove an exemption from the Act for litigation relating to mesothelioma cases, while MPs on the Public Accounts Committee criticised the Ministry of Justice for failing to consult properly on £300m worth of legal aid cuts introduced by the Act.

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