Will The Reforms In April 2015 Prevent Insolvency Practitioners From Taking Robust Action Against Delinquent Directors?

News

17 November, 2014

From April 2015 the Jackson Reforms will take effect in relation to insolvency litigation. This means that it will no longer be possible to recover a success fee or an after-the-event ('ATE') insurance premium from a losing party.

What will this mean in practice?

A case study…

Company X goes into liquidation. During investigations the Insolvency Practitioner ('IP') discovers evidence to suggest that the directors have been breaching their duties.

The IP wants to commence a claim against the directors under section 212 Insolvency Act 1986. But there is a problem… there is no money to fund such an action.

A solution under the current law…

Fund the litigation under a Conditional Fee Agreement ('CFA') with ATE insurance. In particular, the IP would enter into a CFA with a solicitor and the latter would obtain an ATE insurance policy.

If the claim was successful, the losing directors would be liable for their own legal costs, the IP's legal costs as well as a success fee of up to 100% of these costs and the ATE insurance premium.

If the claim was unsuccessful the IP's would not have any cost liabilities because the ATE insurance policy would pay out in relation to the costs.

How will this solution change after April 2015?

It will still be possible to enter into a CFA and for solicitors to obtain ATE insurance. However, the difference will be that if the claim is successful the losing defendant will only be liable for the IP's legal costs (plus their own legal costs). They will no longer have to pay a success fee or the ATE insurance premium.

What effect will this have?

The main concerns that have been expressed are:

  1. Fewer claims will be brought against directors therefore there will be a reduced return for creditors.
  2. Directors will be less willing to agree an early settlement of the case - because they will not face the same financial threat if they lose at trial.
  3. It will encourage dishonesty and malpractice from directors - as they think they will be able to get away with it.

In relation to (1), there certainly is evidence to suggest that some firms will be less inclined to take on cases where they are not set to make a large recovery if they win - via the success fee. However, this cannot be said across the board.

At Forbes we work with our clients to achieve the best possible outcome in every case. It is not in any client's best interests to run a case to trial if it has low prospects of success.

Therefore, whilst we will run cases on a no win no fee basis, we do not need to recover large success fees to make this viable.

In relation to (2), it is true that come April next year directors will no longer face the prospect of having to pay a success fee and ATE premium on top of their own costs and the IP's basic costs. However, this is not the sole incentive for directors to settle early. If a director has a weak defence they will still be incentivised to settle early in order to avoid the likelihood of losing at trial and having to pay their own costs and those of the IP. Conversely, even with the current law, if a director has a strong defence the prospects of him having to pay a success fee and ATE premium will be low - as will his inclination to settle early.

Finally, in relation to (3), this will only happen if IP's allow it to. We do not believe that this is a necessary consequence as our approach will not be affected by the reforms next April. We will continue to work closely with our Insolvency Practitioner clients to achieve the best possible outcome in every case.

If you would like further information in relation to our approach to insolvency litigation and the funding options available please contact Lucie Cocker on 01254 222342 or by email Lucie Cocker

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