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16/12/2015

Cost of ending insolvency exemption from LASPO Act rises to £480m

Last year, the insolvency profession was able to retrieve approximately £480m owed to creditors thanks to an exemption for insolvency litigation from the 2012 Legal Aid, Sentencing and Punishment of Offenders Act.

In 2014, again thanks to the exemption, the profession started work on cases to pursue over an approximate £1bn of creditors’ money, which was being held onto by directors of failed companies and others.

Unfortunately, the existence of the exemption that makes retrieving the money possible is under threat and could be ended by the government as early as the end of this week.

The financial benefits of the exemption have been identified by new research by Professor Peter Walton of the University of Wolverhampton and updates earlier research published in April 2014 (again by Professor Walton). The 2014 research was based on government data from 2010 and a 2013 survey of the insolvency profession. The new report is based on 2014 government data and a 2015 survey of the insolvency profession.

The exemption in question allows for certain costs (such as Conditional Fee Arrangement uplifts) to be reclaimed in full from losing defendants in insolvency cases. This is important as otherwise insolvency litigation would be very difficult to fund: cases are usually brought on behalf of an insolvent estate by an insolvency practitioner seeking to return money into the estate from those that are refusing to pay it back; but an insolvent company tends not to have much money to hand. Defendants can be the company’s former directors, or people connected to a bankrupt, for example.

Essentially, the exemption gives the creditors of insolvent companies a level playing field with those that are withholding money from them. Without the exemption, insolvency litigation is difficult to fund; with the exemption, it is much easier to fund.

One of the largest creditors that would be affected is the taxpayer: approximately £115m owed to HMRC was retrieved last year.

We’ve covered several arguments in favour of the exemption here.

The new research shows a huge increase in the amount of money realised by the insolvency profession through the use of Conditional Fee Arrangements (this sort of case will be most affected by an end to the exemption). The earlier report found that, significantly, only £160m of creditors’ money was realised every year, and £300m pursued. The market is developing.

The new research shows 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;
    • 54% would seek to use third party funders; 52% of survey respondents have never used third party funding before.
    • 22% would seek to use Damages Based Agreements; 90% of survey respondents have never used a DBA before.
  • According to the survey, the uncertainty around the future of the insolvency exemption has led to:
    • 17% of respondents taking on fewer cases;
    • The cost of After-the-Event litigation insurance rising for 38% of respondents.

A full report will be published by Professor Peter Walton early next year (disclaimer: R3 and others have sponsored Professor Walton’s work).

The research suggests that the government would be taking a huge risk were it to end the exemption. R3 believes that there should be a full review of the impact of ending the exemption, especially on taxpayers, other creditors, and rogue directors before any changes are made. To date, this work hasn’t been done. Going by Professor Walton’s work, it looks like the biggest beneficiaries of ending the exemption would be rogue directors.

A thorough review of the exemption is needed before the government takes any steps to scrap it.

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.