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16/12/2015

Ministry of Justice risks half a £billion payday for rogue directors – at ordinary businesses’ and taxpayers’ expense

  • Loss of insolvency exemption from LASPO Act would create legal funding black hole
  • Up to £115m of taxpayer money at risk

Up to almost half a billion pounds owed to creditors is now at risk of staying in the hands of rogue directors and others every year if the Ministry of Justice decides to end an exemption for insolvency litigation from the 2012 Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act, according to new research.

The research, from 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.

An earlier report by Professor Walton found that in the twelve months before July 2013, £160m of creditors’ money was retrieved, while in 2010, just £300m of creditors’ money was pursued.

An announcement by the Ministry of Justice on the future of the insolvency exemption from the LASPO Act is expected by the 17th of December.

Phillip Sykes, president of insolvency trade body R3, says: “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 Ministry of Justice’s arguments in favour of ending the exemption just don’t stack up. Worse, the government hasn’t even carried out its own assessment of how the LASPO Act will affect insolvency were the exemption to end. The government has strayed a long way from evidence-based policy making.”

“The value of insolvency litigation has only grown since it was originally exempted from the LASPO Act. The type of litigation affected by the exemption was in its early stages five years ago, but it is really starting to develop now. It is vital that the government now carries out a proper review of the future of the exemption and doesn’t rush into anything.”

Phillip Sykes adds: “The exemption helps level the playing field between ordinary creditors and those withholding money from them. Without the exemption, creditors and the insolvency profession have an uphill struggle to retrieve what is owed.”

“If the government is cutting budgets and trying to boost tax revenues, I don’t see how it can justify happily saying goodbye to up to £115m of taxpayer money a year. The government is cutting off its nose to spite its face.”

R3 is one of ten business groups that have campaigned for the insolvency exemption from the LASPO Act to be made permanent. Other groups include ACCA, the Association of British Insurers, the Bar Council, the British Property Federation, the Chartered Institute of Credit Management, the FSB, ICAEW, ICAS, and the Insolvency Practitioners Association.

Insolvency litigation is used to recover funds owed to creditors by directors, bankrupts, or others following a company or individual’s insolvency. The existing exemption from the LASPO Act allows certain costs in insolvency litigation (Conditional Fee Arrangement uplifts and After-the-Event insurance premiums) to be recovered in full from losing defendants.

Business bodies and the insolvency profession fear that the loss of recoverability will make insolvency litigation difficult to fund: recovered costs are often the only way to pay for a case as there are often no funds left in an insolvent estate.

Phillip Sykes adds: “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 Ministry of Justice has indicated that it is looking to third party funding to take up the slack following the end of the exemption. While third party funding is an incredibly valuable part of the existing litigation funding landscape, it is only a relatively small part. The loss of the exemption would create a funding black hole.”

“It is the most difficult cases involving fraudulent directors, or organised crime, which are likely to be unsuitable for third party funding. It is these cases which currently produce the largest redress.”

According to the research, approximately 160 cases per year use third party funding, realising £45m – compared to a total of approximately 2,300 CFA-backed cases per year (and approximately £480m of realisations).

Notes

  • Statistics based on survey of insolvency profession (fieldwork dates: 30 November-8 December 2015; 337 respondents, including 183 insolvency appointment takers. There are approx. 450 active UK insolvency appointment takers) and analysis of 2014 Insolvency Service Secretary of State sanctions request data.
  • A full report will be published in 2016.
  • The University of Wolverhampton research has been sponsored by R3, ACCA, ICAEW, ICAS, the Insolvency Lawyers Association, the Insolvency Practitioners Association, IRS, JLT Specialty Ltd, and Willis.

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.