The government has caved under pressure to change a policy which will ensure that an estimated £160m can be returned to creditors from insolvencies.
In a u-turn the MoJ announced that insolvency litigation will still be exempt from the Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act.
The exemption was due to expire in April, but after trade bodies and MPs put co-ordinated pressure on justice minister Chris Grayling, he confirmed that the exemption will be maintained.
Lobby groups claimed that if the exemption had expired in April as planned, it would have been impossible in many business insolvencies to fund legal action to reclaim debts owed by directors or third parties to creditors.
Seven trade bodies had signed a joint letter to the minister requesting that the exemption was kept.
They were the Federation of Small Businesses (FSB); the British Property Federation; the Chartered Institute of Credit Management; the ACCA; the ICAEW; the ICAS and insolvency trade body R3.
R3 said the decision will protect £160m of creditors’ money a year that otherwise could have been kept by fraudulent or negligent directors or third parties.
Under the exemption, insolvency practitioners can continue to use ‘no-win, no-fee’ funding arrangements to pursue directors and third parties for creditors’ money.
Without the exemption, such court cases would have been uneconomical.
Giles Frampton, president of R3, said: “We are absolutely delighted by the government’s decision. Insolvency litigation brings back millions of pounds every year to small businesses and taxpayers owed money by negligent or fraudulent directors.
“This money would have been put at risk if insolvency practitioners lost their ability to use ‘no-win, no-fee’ funding from April.”
He added: “The decision is a big boost for the fight against business fraud and malpractice, and will help keep smaller creditors on a level playing field with those determined to withhold money from them.”
The extension of the exemption was announced in a written ministerial statement on 26 February by Justice minister Lord Faulks.
He said: “Accordingly, no win no fee agreements in insolvency proceedings will continue for the time being to operate on a pre-LASPO Act basis, with any conditional fee agreement success fees and after the event insurance premiums remaining recoverable from the losing party.
“We will consider the appropriate way forward for insolvency proceedings and will set out further details later in the year.”
By Marcel LeGouais