201509 CM September

CREDIT
INSOLVENCY NEWS
CIVIL LITIGATION
COSTS IN INSOLVENCY
THE Legal Aid, Sentencing and
Punishment of Offenders Act 2012
introduced reforms based on
recommendations by Lord Justice
Jackson, who was critical of cost recovery
arrangements that were common in claims
made against government departments,
particularly as regards success fees and
insurance premiums where conditional fee
agreements (CFAs) were in place. He felt
these arrangements imposed a significant
and disproportionate cost burden on
the tax payer. The changes introduced
rendered the success fee uplifts and
premiums irrecoverable, but there was
a temporary stay in implementation in
respect of litigation brought by insolvency
practitioners (IPs).
The insolvency community successfully
argued that IPs were in a different position
to most litigants, as they were often
seeking to pursue claims in circumstances
where there were insufficient funds in the
insolvency estates and would otherwise
be prevented from taking action against
directors and others in respect of
misappropriated assets etc. Those actions,
it was argued, depended on the ability of
IPs to enter into CFAs, whereby the lawyers
agreed they would be paid only in the
event of a claim succeeding. Government
departments such as HM Revenue and
Customs (HMRC) would sometimes be
beneficiaries of such actions, as would
other creditors.
The stay or exemption for IPs is due
to be further considered. It was due to
end this April, but has been extended
for a further period. If IPs were unable to
persuade lawyers to undertake work on a
CFA basis, would recoveries and returns
to creditors suffer? Are there alternative
ways of unlocking the potential benefits for
creditors?
Third parties will sometimes fund
actions. They often demand a high
percentage of any proceeds, but can
provide a solution where the value of the
claim is substantial. With one notable
exception, most such funders will not be
interested in claims of less than £1 million,
and that would rule out recovery action
in many insolvency cases. Research by
Professor Peter Walton, instigated by R3
and supported by the IPA and others,
indicated that many claims are for sums in
the region of £50,000.
ALTERNATIVE PROVSIONS
Another alternative might be the new
provisions in the Small Business, Enterprise
and Employment (SBEE) Act 2015; when
fully implemented this will permit IPs to
assign rights in actions such as fraudulent
or wrongful trading by directors, and
thereby realise some funds for creditors.
Walton’s report of his findings was written
before the terms of the SBEE Bill were
settled, and initially the Bill only provided for
assignment in the above limited instances.
The SBEE Act now encompasses a broader
range of assignable actions, including
preference and undervalue transactions
and so might now present a viable option
for IPs.
Walton’s report asserts that the IP’s
inability to chase down monies would
be detrimental to the public interest and
remove an important weapon in the IP’s
armoury. Whether that view holds sway
when the exemption is reconsidered
remains to be seen. Many will have their
say in the meantime, including Lord Justice
Jackson who retains an active interest in
the subject. The Government may feel that
the widening of the SBEE provisions goes
some way to providing alternatives for IPs,
though it is worth noting that the relevant
provisions are not expected to be in force
until October next year, at the earliest.
That delay may reinforce arguments for an
extension of the present exemption at least
until then, but Jackson wanted to see his
recommendations applied to all types of
litigation and whilst there are some other
exemptions for special cases, the argument
for insolvency to remain as one of them
may become more difficult to sustain.
Part of the argument in favour of the
insolvency exemption was that the costs
abuses referred to by Jackson were not
prevalent in insolvency cases. Findings
based on compulsory (court) winding up
cases where sanction for litigation was
sought by IPs illustrate that worthwhile
returns are possible (a 74p dividend to
HMRC in one case, and a 23p dividend
to ordinary unsecured creditors in
another), but also suggest that costs of
the liquidation can eat up all the proceeds
of the actions in some cases, and many
take a number of years to work through.
Assignments might provide at least a
quicker solution for IPs and therefore for
creditors, potentially at less cost.
The impact on recoveries and creditor
returns is something that can only be
assessed once any change to the present
arrangements has been made, and after
the new SBEE measures have been used
for some time, at which point there should
be some available evidence of usage of the
new assignment provisions. The Walton
report argues that removal of the CFA uplift
might encourage more culpable behaviour
by bankrupts and directors; if that were to
hold true then of course the effect would
be felt to a greater or lesser extent by
creditors.
David Kerr MCICM is the
Chief Executive of the Insolvency
Practitioners Association (IPA).
CM
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