On 17th December, the Ministry of Justice announced, effective from April 2016, the withdrawal of the exemption to LASPO that insolvency proceedings had previously enjoyed.
What this means in practice is that from April 2016, lawyers’ success fees and ATE (adverse costs) premiums will not be recoverable from the defendant in insolvency cases. Normal costs will still be recoverable from the losing party, as they are in all other forms of litigation.
Since the announcement we have been contacted by several stakeholders for our views. It is our intention to address a number of the more important misconceptions, which have been circulating in various media. The three questions and answers below explain why we support this Government measure on the grounds of fairness, economic efficiency and significantly improved returns for creditors.
- Will the Government’s decision deprive creditors (particularly HMRC) of hundreds of millions of pounds?
For several months, those opposing reform have tried to establish in the public’s mind the figure of £160m as the additional amount the exemption returns to creditors under the status quo. The figure derives from a report from Professor Walton but it relates to monies recovered from insolvency cases. How much of this was actually distributed to HMRC and other creditors is a tiny fraction of the total recovered. For example, the Walton report analysed the outcomes of 96 of the Insolvency Service’s “Non-win/No-Fee” (“CFA”) cases over a three year period (2010 – 2013). Only 14 of the 96 cases showed any positive recovery at all and fewer still resulted in any distribution to creditors whatsoever. Lord Justice Jackson, the author of the reforms under LASPO, has derided the suggestion that the figures in the Walton report support the £160m claim: “his report simply does not support that [£160m saving] proposition.”
So what is the difference between the oft-quoted £160m and the far lesser figure actually paid out to the creditors? The answer is: fees. Once the money is recovered on these cases, lawyers’ fees need to be paid, as do insurance premiums, before any money is distributed to creditors. The “No Win/No Fee” regime means that lawyers typically get paid a 60-100% bonus on their base fees. The insurance cost is also very high. Premiums can cost as much, sometimes more, than an IPs own legal costs. It is these costs that are at the centre of the debate around the LASPO Act.
- Will a funding “Black Hole” be created by the loss of the Insolvency exemption?
(a) It is only the Success Fee and ATE Premium that will no longer be recoverable from the losing defendant. Normal costs have been and will continue to be recoverable. If Office Holders believe a CFA offers best value in maximising returns to creditors then they will still be perfectly at liberty to use them. Lawyers may only offer CFAs when they know they have a good prospect of success. There are many other forms of financing and these may well present a better result for creditors – then Office Holders will want to use those instead.
Having operated exclusively in the insolvency litigation funding market for 6 years, we have seen returns to creditors using the funding model far exceed the results of CFA funded cases. Indeed, most of our cases are referred to us only once the CFA model has failed to deliver any return at all to the insolvent estate.
(b) In an article from the R3 website various highlights from the new 2015 Walton Report were included (even though R3 say that the report will not be published until next year). Among them was a statement that 52% of IPs intend to use litigation finance once the exemption is removed. This is far higher than the 20% that LJ Jackson stated use CFAs. We have not seen the 2015 Walton Report so we cannot comment further at this stage.
(c) Billions of pounds have been raised by the litigation funding industry in recent years – certainly plenty of capital is available to back good insolvency cases. Funders backing poor cases or charging too much will soon be out of business.
(d) It is critical to remember litigation funders only make a return once all costs have been paid. In other words, their interests are perfectly aligned with those of the creditors. The more efficiently and quickly the case is resolved, the quicker the creditors get their return and the quicker the funder makes its return accordingly.
(e) Damage Based Agreements have been improved. They pay lawyers out of the gross proceeds of the case (so much better for the lawyers than the net proceeds that the funders are restricted to).
(f) Compensation Orders: the Government recently introduced these Orders in the Small Business Enterprise and Employment Act 2015. It is an effective way of bringing justice to bear on cases which have proved hard to fund. Compensation Orders give the Courts the power to proportionately penalise the wrongdoer without any of the costs of litigation.
- Is the decision going to benefit so many ‘rogue’ directors?
There have been suggestions that the end of the exemption was somehow a “windfall” to “fraudsters”. There appears to be an inference being developed that business failure is in some way related to criminality. This is simply not the case. Any business sector will tell you that the vast majority of people struggling to save their businesses are hard-working and honest.
According to an article in the Daily Telegraph on 1st October 2014, since 2006 a record number of under 35s have started new companies in the UK. Britain is becoming a nation of entrepreneurs, which must be a wonderful thing for our country, for our youngsters and for future generations.
Sadly, it is an established fact that the majority of these companies will fail. We should all want lessons to be learned and for those more experienced entrepreneurs to try again and succeed next time. A UK insolvency industry that has an all too easy “No Win/No Fee” option to sue every director who makes a mistake, would stifle this entrepreneurial phenomenon.
The Government has sought to strike the right balance by ending the insolvency exemption.
Of course there is then a much smaller group of serious serial fraudsters that operate in the UK economy. The capital and legislative tools exist to bring these people to justice. The UK is blessed with a large pool of exceptional IPs, solicitors and barristers that deserve the backing of that capital.