Insolvency trade body R3 and other business groups have called on the government to abandon legal reforms that could cost creditors “over £160m per year”.
The proposed change would see insolvency litigation removed from exemption from the ‘no-win, no-fee’ legal funding introduced by the 2012 Legal Aid, Sentencing and Punishment of Offenders Act (LAPSO).
R3 has said the exemption is the “only way” creditors are able to afford to fund court cases to retrieve money from rogue directors that have wrongly taken money out of a failed business.
Giles Frampton, president of R3, says: “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.
“Insolvency litigation does everything the Jackson reforms were designed to protect. It’s in the public interest, it keeps legal costs down, and it protects public funds. It makes no sense for the exemption to end.”
In a public letter to Prime Minister David Cameron, Frampton, along with the Institute of Credit Management (ICM), the British Property Federation, the Institute of Chartered Accountants in England & Wales, the Association of Chartered Certified Accountants, and the Institute of Chartered Accountants Scotland, has called for the reform to be dropped.
A report from the University of Wolverhampton this year found that insolvency practitioners are pursuing up to £300m of creditor funds using the ‘no-won, no-fee’ funding – £160m is returned to creditors from rogue directors every year.
Philip King, chief executive of the ICM, said: “Money lost through suppliers or customers entering insolvency can threaten the survival of a business.
“It’s crucial that the insolvency regime is equipped with the right tools to return creditors’ money to them. Including insolvency litigation within the Jackson reforms would be a huge setback for creditors: it would see creditors’ money stay in rogue directors’ hands.”