Business leaders urge Government to scrap insolvency litigation reforms

BUSINESS groups, including accounting and insolvency bodies, the Institute of Credit Management, and the British Property Federation, have accused the Government of being ‘anti-business’ over a series of proposed legal reforms to insolvency litigation.

In a letter to Prime Minister David Cameron, the lobbyists warn the legal reforms could cost creditors more than £160m a year from next April – with rogue directors the big beneficiaries.

The letter, signed by R3 president Giles Frampton, Institute of Credit Management CEO Philip King, British Property Federation policy director Ian Fletcher, ICEAW executive director Vernon Soare, ACCA CEO Helen Brand and ICAS CEO Anton Colella, calls on the government to scrap the planned changes.

The letter, also circulated to Chancellor George Osborne, Business Secretary, Vince Cable and Justice Secretary, Chris Grayling, claims the changes will increase tax avoidance and evasion, and will benefit directors of insolvent companies who have committed fraud or behaved recklessly.
 
From April 2015, insolvency litigation will no longer be exempt from the crackdown on ‘no-win, no-fee’ legal funding introduced by the 2012 Legal Aid, Sentencing and Punishment of Offenders Act – the so-called ‘Jackson’ reforms.

This type of funding is often the only way creditors can afford to pay for court cases to retrieve money from rogue directors that have wrongly taken money out of a failed business.
 
The letter follows a High Court ruling earlier this month that the Ministry of Justice had not properly reviewed its much-criticised decision to end the exemption from the Jackson reforms for mesothelioma cases.
 
Alongside defamation cases, mesothelioma and insolvency were originally temporarily exempted from the Jackson reforms to allow time for alternative funding mechanisms to be found. However, despite the lack of alternatives in both cases, the Government plans to end the two temporary exemptions.
 
Mr Frampton said: “Quite rightly the Government has stressed the importance of cracking down on directors who misbehave, but it’s these directors that will be the big winners from the end of insolvency litigation’s Jackson exemption. Creditors – including the taxpayer and small businesses – will be the ones who lose out.
 
“The Government’s commitment to ending the exemption is misguided. The decision flies in the face of the available evidence and there has been no impact assessment on insolvency litigation.
 
“Insolvency litigation does everything the Jackson reforms were designed to protect. It’s in the public interest, it keeps legal costs down, and it protects public funds. It makes no sense for the exemption to end.”
 
Philip King added that money lost through suppliers or customers entering insolvency could threaten the survival of a business.

“It’s crucial that the insolvency regime is equipped with the right tools to return creditors’ money to them. Including insolvency litigation within the Jackson reforms would be a huge setback for creditors: it would see creditors’ money stay in rogue directors’ hands,” he said.
 
According to a 2014 University of Wolverhampton report, insolvency practitioners currently pursue up to £300m a year of creditors’ money using ‘no-win, no-fee’ funding, including up to £70m owed to taxpayers. Over £160m is returned every year.
 
The signatories said ‘no-win, no-fee’ funding was often the only way creditors and insolvency practitioners could pay for legal cases to retrieve money from directors – because the money that could have been used to fund cases has already been taken by directors.
 
Under the current system, successful claims see both creditors’ debts returned and the rogue director charged for the cost of the court case.
 
The system also encourages directors to settle early to avoid expensive court cases and deters directors from taking money in the first place. 83% of cases currently settle before court, and, according to the University of Wolverhampton report, nine-in-10 of these settlements would not have been settled without the threat of creditors recovering the court costs from the director.
 
“Without ‘no-win, no-fee’ funding, insolvency litigation will become unaffordable for all but the largest creditors. Rogue directors won’t believe their luck,” added Mr Frampton.