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A Big Win for Creditors & Insolvency Practitioners: MOJ Extends Insolvency LASPOA Exemption
On the 26 of February, with a little more than a month until it was due to commence sections 44 and 46 of the LASPO ACT, The Ministry Of Justice (MOJ) announced that it would extend the exemption allowing for the recoverability of Conditional Fee Agreements and After the Event (ATE) Insurance Premiums for Insolvency matters.
The move is thought to be the result of heavy lobbying from Trade Body R3 and 6 other industry groupsi who have continuously made the case for Insolvency matters being permanently excluded from part 2 of the LASPO Act. The MOJ remained silent on when the exemption would be reviewed but addressing parliament, justice minister Lord Faulks noted that they would be “considering the appropriate way forward “and would “set out further details later in the year.”
Proponents of extending the exemption have argued that extending the general prohibition on recovery of CFA success fee uplifts and ATE insurance premiums to Insolvency matters would make many insolvency cases uneconomic. This would mean that in many cases it would become impossible for IP’s to pursue negligent and fraudulent directors, an occurrence which would clearly be against public interest. Insolvency trade body R3 said that the decision to extend the exemption would protect around £160 million worth of creditors' money a year that could otherwise have been kept by fraudulent or negligent directors or third parties, as only the largest of creditors would have been able to afford to pursue litigation had the exemption not been extended.
While most civil litigations matters have been subject to LASPOA since April 2013, Insolvency proceedings were previously delayed until April 2015 to give insolvency practitioners time to prepare for and adapt to the changes. However, the Government has now agreed that more time is needed and extended the exemption “for the time being.” Accordingly, Conditional Fee Agreements and After the Event (ATE) insurance in insolvency proceedings will continue for the time being to operate on a pre-LASPO Act basis with any success fees and premiums remaining recoverable from the unsuccessful party.
Insolvency cases are different from many other types of civil litigations because in most cases the only way an Insolvency practitioner can justify taking on the risk and the expense of litigations is where a CFA enables them to recover the bulk of their own costs, and an ATE Policy removes the risk of adverse costs and disbursements associated with a loss. CFA’s and ATE allow the IP to take the case forward without significantly reducing the assets available to be distributed to the creditors. If the Government does away with the recoverability of the CFA uplift in these cases it removes a significant incentive for the IP to litigate on behalf of creditors.
While the aim of LASPO was to crack down on the rising cost of civil litigation and to better protect public funds and the public interest, it may have some undesirable side-affects when applied to Insolvency cases. Insolvency litigation ensures that small businesses and taxpayers who are owed money by negligent and fraudulent directors are paid.
TheJudge stands with R3 and other Industry groups regarding the recoverability of CFA’s and ATE Premiums for Insolvency cases. Having seen first-hand the effect of LASPOA on other kinds of civil litigation, post-April 2013 we agree that many IP’s will be left without a way to pursue fraudulent directors where CFA’s and ATE insurance are no longer economic. While we hope to see the exemption remain in place for Insolvency we recommend that IP’s and firms continue to operate on the basis that the exception may not last forever.
If you have insolvency case requiring ATE insurance or litigation funding, please contact our offices. Our experienced broker team can assist by offering market searches and negotiating bespoke policies for one-off cases, as well as arranging facilities for firms with a number of cases requiring insurance. We can source cover for cross undertakings in damages, additional cover for security for costs and a have a range of schemes available for firms with a high volume of cases. In some cases we can even negotiate a waterfall to protect the law firm’s fees should there be a shortfall in expected recovery.
Rebekah Weiler is an Associate Director at TheJudge, you can contact Rebekah to discuss a case by email or phone at: Rebekah.Weiler@TheJudge.co.uk or 0207 337 6035
i. The Federation of Small Businesses (FSB); the British Property Federation; the Chartered Institute of Credit Management; the ACCA; the ICAEW; the ICAS