The government decision to end the special arrangement that helped to fund insolvency litigation has met with widespread criticism from business and legal professionals.
The trade body R3 said it would amount to a “half-billion-pound pay day for rogue directors”.
The controversy arose when the government confirmed that from April this year, insolvency litigation will no longer be exempted from the costs regime imposed by the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO).
The decision means that in future it will not be possible to recover success fees and after-the-event insurance from losing defendants. This brings insolvency in line with other forms of civil litigation but critics say it will leave many creditors unable to recover money owed to them because litigation will be much more difficult to fund.
R3 points out that research “carried out by Professor Peter Walton at the University of Wolverhampton, shows that the type of litigation currently enabled by the exemption helps retrieve approximately £480m owed to creditors per year and enabled the insolvency profession to pursue over £1bn owed to creditors in 2014 – this includes approximately £115m owed to HMRC being retrieved and approximately £240m owed to HMRC being pursued”.
Phillip Sykes, president of insolvency trade body R3, said: “The Ministry of Justice is at risk of throwing creditors’ money away. The only beneficiaries of an end to the existing exemption are rogue directors and others who try to prevent money getting back to creditors. It’s honest, ordinary businesses and the taxpayer that will lose out.
“The exemption helps level the playing field between ordinary creditors and those withholding money from them. With no exemption, rogue directors and others actually have an incentive to withhold creditors’ money from insolvent estates: it makes it almost impossible to fund legal action against them.”
The ending of the exemption has also been condemned by several other groups including the Bar Council, the Association of British Insurers and the Chartered Institute of Credit Management.
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