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06/04/2016

From today it's harder to return money to creditors from rogue directors

From today, legal funding changes mean that millions of pounds a year of creditors' money could stay in the hands of rogue directors.

When a company enters an insolvency procedure or an individual is made bankrupt, an insolvency practitioner is appointed to oversee the insolvent entity’s ‘estate’ and return as much money to the company or individual’s creditors as possible.

Sometimes this involves taking legal action against people, including former company directors, who owe the estate money. Directors, for example, may loan themselves money from the company and then refuse to pay it back once the company enters an insolvency procedure.

Because insolvent estates do not have much money available to fund litigation to retrieve money, costs need to be reclaimed from defendants (who owe the estate money) in many cases in order for legal action to proceed.

From April 2013, insolvency litigation has been exempted from the Legal Aid, Sentencing and Punishment of Offenders Act 2012. This allowed insolvency practitioners to continue to reclaim certain costs from losing defendants, which was otherwise prevented by the Act.

From today, this exemption will end. This will make it much harder to afford legal action against those that owe money to insolvent estates. This means less money will be available for creditors when companies fail or individuals are made bankrupt.

In 2014, over £1 billion of claims were pursued using the type of legal funding allowed by the exemption. In 2015, approximately £480m was returned to insolvent estates thanks to the exemption.

R3 is one of ten business groups that support the exemption’s continuation. 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.

Phillip Sykes, R3 president, says: “The end of the exemption is a blow to creditors, including small businesses and the taxpayer. The only winners are rogue directors and others who refuse to pay money back to whom it is owed.”

“The exemption was a public good. It deterred people from keeping hold of money owed to creditors and helped return hundreds of millions of pounds a year to where it belonged.”

“The government has refused to listen to the evidence on this and has ignored serious concerns from creditor groups and the insolvency profession.”

 

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.