Back to listing

18/01/2016

Ministry of Justice ends Jackson exemption

 In mid-December, the government announced an early Christmas present for rogue directors in the form of a half a £billion payday. In a written statement the Minister of State for Civil Justice, Lord Faulks QC, announced that he was ending insolvency litigation’s exemption from the Legal Aid, Sentencing and Punishment of Offenders Act.

Simply put, this means that insolvency practitioners will effectively have limited access to ‘no win, no fee’ funding against directors and others who refuse to pay back creditors in insolvency cases. These arrangements are usually the only way to fund this kind of litigation, and help bring better returns back to creditors, including HMRC and small businesses.

This decision is incredibly disappointing on a number of fronts.
 
First of all, it flies in the face of all available evidence. The latest research by Professor Peter Walton of the University of Wolverhampton*, found that the exemption helps to retrieve approximately £480m owed to creditors from rogue directors and others every year. Around £115m of this is owed to HMRC, and around £1bn of new claims are pursued per year.
 
On top of this, 51% of appointment takers who responded to a survey of the insolvency profession said that none of their cases would have gone ahead without the exemption. Meanwhile, 86% believed that less money would be returned to creditors were the insolvency exemption to end. This loss to creditors is now set to become a reality.
 
What’s also particularly disappointing about this decision is the lack of a formal review by the government on this issue. It’s not exactly a win for evidence-based policy making. The only justification provided to us by the government was the need to be ‘consistent’, but it’s an incredibly high price to pay for that.
 
R3 has long called for a formal impact assessment into the consequences of ending the exemption, none was ever done.
 
According to the ministerial statement, the insolvency exemption will end in April 2016. A change of mind is unlikely.
 
This leaves us with a huge black hole for funding insolvency litigation. The survey of the insolvency profession found 63% would take on fewer ‘no asset’ cases without the exemption, while half (49%) would stop or decrease litigation. Third party funding is incredibly valuable for the insolvency profession under the current regime, but will it be enough after April?
 
While the government has indicated that it expects third party funding to fill the void from the exemption, the research indicates that this is only a relatively small part of the market, funding only about 160 cases out of approximately 2,300 each year.
 
The government’s decision means cases against those withholding money owed to creditors will be harder to fund, returns to creditors will fall and money will stay in the wrong hands.
 
*A full report from the University of Wolverhampton will be published soon.

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.