In April 2013 as part of the Jackson reforms, the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) brought an end to the recoverability of success fees and after-the-event insurance premiums from the losing party. The Government granted limited reprieves for certain cases, including those run by insolvency office holders. This LASPO exemption for insolvency cases is due to come to an end in April 2015.
Will the exemption end really make much difference?
R3 states that success fees and after-the-event insurance premiums are rarely recovered in practice. However, in a report commissioned by R3 to assess the impact of the reforms**, it is argued that if the insolvency exemption ends, fewer claims are likely to be pursued as there will be a reduced return for creditors who will have to pay the fees if the case is successful. Similarly, of the claims that are brought, fewer are likely to settle at an early stage as the losing party is no longer faced with the imminent threat of hefty legal fees that include their opponent’s success fees and insurance premiums.
In addition, the report goes on to state that the number of specialist insolvency counsel willing to take on cases is dwindling as the end of the exemption approaches. They are simply not prepared to take on cases where the return in fees is uncertain. Over time, it is thought that this lack of experienced counsel will lead to less insolvency actions being pursued. The report argues that this will encourage malpractice and dishonesty among potentially insolvent businesses.
The Government has recently announced that they do not intend to renew the existing insolvency exemption. In response to MPs’ questions the Justice Minister, Shailesh Vara, confirmed that the Government would rely on ‘existing impact assessments’ carried out. The original impact assessments did not mention insolvency litigation at all and simply dealt with more run of the mill court claims.
Overall, apart from trying to ensure consistency across the board in line with the Jackson reforms, the Government has not offered any persuasive arguments in favour of the removal of the exemption. One thing for sure is that the substantial revenue currently recovered in insolvency proceedings by HMRC for the benefit of the taxpayer will be significantly reduced should the exemption come to an end. An independent report** has estimated that creditors on the whole will be £160m a year worse off through lack of litigation recoveries. The fight is not yet over – R3 and the other industry bodies continue to campaign*.
Even if the exemption is lost next April, that will only be for new cases. IPs will still be able to recover insurance premiums and success fees after that date, provided they enter the Conditional Fee Agreement before April next year – so don’t leave it to the last minute!
** Walton P, The Likely Effect of the Jackson Reforms on Insolvency Litigation –an Empirical Investigation, (April 2014)