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16/10/2014

Business groups call on government to scrap legal reforms that will cost businesses and taxpayers £160m per year

  • Rogue directors will be main beneficiaries from legal reforms to insolvency
  • Proposed changes are “anti-business” and “fly in the face of available evidence”, say business groups
  • Ministry of Justice decision undermines Business Secretary’s efforts to combat ‘dodgy directors’
  • Letter signed by: Institute of Credit Management; British Property Federation; Institute of Chartered Accountants in England & Wales; Association of Chartered Certified Accountants; Institute of Chartered Accountants Scotland; insolvency trade body R3

Business groups, including accounting and insolvency bodies, the Institute of Credit Management, and the British Property Federation, have warned that government legal reforms could cost creditors over £160 million per year from next April – with rogue directors the big beneficiaries.

A letter has been signed by six influential business groups and sent to the Prime Minister, David Cameron, and Justice Secretary, Chris Grayling, calling on the Government to scrap the planned change.

The letter says the planned changes “are anti-business, 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 ‘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 2nd October High Court judgment that the Ministry of Justice has 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.

Giles Frampton, President of R3, says: “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, chief executive of the ICM, says: “Money lost through suppliers or customers entering insolvency can 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.”

According to a 2014 University of Wolverhampton report, insolvency practitioners currently pursue up to £300 million per year of creditors’ money using ‘no-win, no-fee’ funding, including up to £70 million  owed to taxpayers. Over £160 million is returned every year.

‘No-win, no-fee’ funding is often the only way creditors and insolvency practitioners can 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-ten of these settlements would not have been settled without the threat of creditors recovering the court costs from the director.

Giles Frampton adds: “Without ‘no-win, no-fee’ funding, insolvency litigation will become unaffordable for all but the largest creditors. Rogue directors won’t believe their luck.”

78% of ‘no-win, no-fee’ backed insolvency litigation returns up to £100,000 for creditors. These smaller cases would not attract the third party finance necessary to fund cases once the Jackson exemption ends.

Ian Fletcher, Director of Policy at the British Property Federation, says: “At a time when government is putting so much stress on the transparency and fairness of the insolvency system, it sits awkwardly that they are removing the major source of finance which would allow creditors to expose wrong-doing.”

“Creditors are often already facing significant loss from an insolvency process and the thought of funding litigation as well will dissuade many from taking any action. The removal of the Jackson exemption will really be a step backwards in terms of treating creditors fairly and reprimanding those who behave fraudulently, instead letting them off scot-free.”

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.