Legal reforms planned for next year will have an adverse impact on insolvency litigation and risk costing creditors over £160m a year, with rogue directors the main beneficiaries of the changes, according to a warning from ICAEW, ICAS and ACCA, insolvency trade body R3 and other business groups.
Along with the Institute of Credit Management and the British Property Federation, they are signatories to a letter calling on the government to halt plans to remove insolvency litigation from the crackdown on ‘no-win, no-fee’ legal funding introduced by the 2012 Legal Aid, Sentencing and Punishment of Offenders Act (the so-called ‘Jackson’ reforms).
The six bodies say this type of funding is often the only way creditors can afford to pay for court cases to retrieve money from directors who have wrongly taken money out of a failed business. Under the current system, successful claims see both creditors’ debts returned and the rogue director charged for the cost of the court case.
A 2014 University of Wolverhampton report found that insolvency practitioners currently pursue up to £300m per year of creditors’ money using ‘no-win, no-fee’ funding, including up to £70m owed to taxpayers. Over £160m is returned every year, while the system also encourages directors to settle early to avoid expensive court cases, which happens in 83% of current cases.
The letter says the planned changes ‘are anti-business, will increase tax avoidance and evasion, and will benefit directors of insolvent companies who have committed fraud or behaved recklessly.’
Giles Frampton, R3 president, said: ‘The government’s commitment to ending the exemption is misguided. The decision flies in the face of the available evidence and there has been no impact assessment on insolvency litigation.
'Quite rightly the government has stressed the importance of cracking down on directors who misbehave, but it’s these directors that will be the big winners from the end of insolvency litigation’s Jackson exemption. Creditors – including the taxpayer and small businesses – will be the ones who lose out.’
The University of Wolverhampton research also shows 78% of ‘no-win, no-fee’ backed insolvency litigation returns up to £100,000 for creditors. These smaller cases would not attract the third party finance necessary to fund cases once the Jackson exemption ends.
Frampton said: ‘Without “no-win, no-fee” funding, insolvency litigation will become unaffordable for all but the largest creditors. Rogue directors won’t believe their luck.’
