Half a £billion payday for rogue directors as MoJ ends insolvency exemption
The Ministry of Justice has announced that it is ending the exemption for insolvency litigation from the Legal Aid, Sentencing and Punishment of Offenders Act 2012. Recent research by the University of Wolverhampton showed that this exemption helps retrieve approximately £480m owed to creditors from rogue directors and others every year, with £1bn of new claims begun in 2014.
Phillip Sykes, president of R3, the insolvency trade body, says:
“We are deeply disappointed by the Ministry of Justice’s decision. It’s a decision that flies in the face of all available evidence. The government is potentially writing off hundreds of millions of pounds per year owed to not just HMRC, but to hundreds, if not thousands, of ordinary honest businesses as well.”
“The only winners today 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.”
“At no point has the government engaged with the arguments in favour of extending the exemption, nor has it carried out an impact assessment of what the end of the exemption would mean.”
“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.”
The insolvency exemption from the LASPO Act provided that certain costs (e.g. the Conditional Fee Arrangement uplift) could continue to be reclaimed from losing defendants in insolvency litigation. This sort of litigation is used to retrieve money owed to insolvent companies (which can be repaid to creditors) from individuals or organisations that are refusing to pay it back.
Without the exemption, the insolvency profession and business groups are worried that such insolvency litigation will be difficult to fund: there is often no money left in an insolvent company to fund legal action without the ability to reclaim costs.
Recent (December 2015) research by Professor Peter Walton of the University of Wolverhampton found that:
- CFA-backed insolvency litigation realises approximately £480m per year for insolvent estates (up from £160m in 2013), with around £115m of this owed to HMRC.
- CFA-backed insolvency litigation is currently used to pursue approximate claims in excess of £1bn per year – up from £300m per year in 2010.
- Approximately £240m of these claims relate to money owed to HMRC – up from £50-70m in 2010.
- CFA use in insolvency litigation (in compulsory liquidation cases) rose 39% from 2010 to 2014, while the total number of compulsory liquidations fell 22%.
- Third party funding is a relatively small part of the insolvency litigation market: approximately 160 cases per year use third party funding, realising £45m – out of a total of approximately 2,300 cases per year and around £480m of realisations.
- Without the insolvency litigation exemption from the LASPO Act, 51% of appointment takers responding to the survey say none of their cases would have gone ahead.
- Were the insolvency exemption to end:
- 86% of respondents to the survey believe that less money would be returned to creditors;
- 63% would take on fewer ‘no asset’ cases;
- 49% would stop or decrease litigation;