‘Honest firms to lose out’ from insolvency litigation reforms

Insolvency lawyers criticised the move last night

Claimants have been taking to internet forums to ask for advice to deal with the false allegations (Getty)

Rogue company directors will enjoy a £500m payday while honest businesses and taxpayers lose out, it was claimed last night, after the Government announced creditors must fund the costs of insolvency legal battles.

The Justice Ministry said reforms of no-win, no-fee legal funding arrangements will apply to insolvency litigation from next April. Justice minister Lord Faulks said the move was designed to address the “high costs of civil litigation” in England and Wales.

The move in effect abolishes the recoverability of legal success fees (CFAs) and after-the-event insurance (ATE) from losing defendants.

Creditors have increasingly used CFAs and ATEs to fund legal claims against rogue firms that go out of business leaving a devastating trail of debt behind them.

Insolvency lawyers criticised the move last night, warning that it will prevent the HMRC from recouping unpaid taxes and leave creditors with no way of getting back money owed.

Critics of such funding methods say they prompted a glut of claims of dubious merit, especially in personal injury cases.

In a move designed to stop such cases, Lord Justice Jackson introduced new rules which transfer the bulk of legal costs on to claimants, without a chance of recovery from rogue directors or companies.

After fierce lobbying the Government agreed a two-year exemption for insolvency cases after it was argued it differed from other commercial litigation in that it is brought for the benefit of all creditors, including the Government itself, rather than one party.

The trade body R3, the Association of Business Recovery Professionals, deplored the decision. Phillip Sykes, president of R3, said: “The Government is potentially writing off hundreds of millions of pounds per year that’s owed not just to HMRC, but to hundreds, if not thousands, of ordinary honest businesses as well.

“The only winners are the rogue directors and others who refuse to repay money owed to creditors after an insolvency. We’re back to an uneven playing field, where rogue directors hold all the cards – and the cash.”

Mr Sykes criticised the Government for failing to answer or engage with the arguments and accused ministers of not carrying out an impact assessment to see what effect the move would have. “The end of the exemption leaves a huge funding black hole for insolvency litigation. This is a blow to the wider business community and the insolvency profession,” he said.

Frances Coulson, of the law firm Moon Beever, who is a former R3 president, said: “Recent research by the University of Wolverhampton showed this exemption helps retrieve approximately £480m owed to creditors from rogue directors and others every year, with £1bn of new claims begun in 2014.

“While some of it may be filled, at significant cost to creditors and the UK, by litigation funding, this does not help the majority of claims, where victims include the taxpayer.

“This is not good news for UK plc or for the compliant businesses who suffer at the hands of the reckless and the criminal.”