Justice minister Chris Grayling is under mounting pressure to rethink Legal Aid changes that trade groups fear will cost firms and taxpayers £160m.
Seven trade bodies have joined forces to influence changes to the controversial policy, which affects insolvency cases, before it takes effect in April.
The policy is set to ensure that from April, insolvency litigation will no longer be exempt from the Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act. Lobby groups say this means that, following a business failure, it will be impossible in many cases to fund legal action to reclaim debts owed by directors or third parties to creditors.
The seven trade bodies lobbying the minister are the Federation of Small Businesses (FSB); the British Property Federation; the Chartered Institute of Credit Management; the ACCA; the ICAEW; the ICAS and R3.
A letter signed by all seven groups has been sent to the minister, to plead for cessation of the exemption to be pushed back until after May’s election. They hope a delay will provide time for a review.
The letter also follows:
- An early day motion signed by 60 MPs from the three major parties calling on the government to review its decision to end the exemption
- Calls in the House of Lords for a review of the decision, which led to business minister Baroness Neville-Rolfe promising to review the policy with the Ministry of Justice
- Research by the University of Wolverhampton that found the exemption allowed the pursuit of up to £300m per year of creditors’ money, including £70m owed to taxpayers. The study found that £160m a year is successfully returned to creditors.
John Allan, chairman of the FSB, said: “There are good reasons for insolvency litigation to remain exempt from the LASPO Act.
“We are deeply concerned that if it is not, many of the smaller but complex cases taken by smaller firms will never see their day in court. This will dramatically reduce the amount of money returned to small business creditors, increase overall business risk, and unfairly harm smaller suppliers.”
Giles Frampton, president of R3, said: “The government is running out of time to avoid damaging the fight against fraud and bad business practice.”
Frampton explained that the insolvency exemption puts creditors, including small businesses and the taxpayer, on a level playing field with those trying to “keep the proceeds of their bad behaviour out of reach”.
Under current rules, when cases to return money to creditors in an insolvency are successful, a major proportion of insolvency litigation costs can be recovered from defendants.
Typically these cases arise because a company’s former director or a third party has been negligent or even fraudulent. Trade bodies believe a reduced ability to reclaim costs would mean that in most cases, no money would be available to fund the legal action, because it would be uneconomic to pursue and there’d be no benefit to creditors.