Insolvency CFA exemption is coming to an end - DAC Beachcroft

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Insolvency CFA exemption is coming to an end

Published On: 1 April 2016

1 April 2016 will see the insolvency profession fall in line with other civil litigation as the exemption, which enabled the recoverability of CFA success fees and After the Event (ATE) insurance premiums from the unsuccessful party to litigation, comes to an end. This recoverability was abolished in other civil litigation in April 2013, principally as one of a number of changes intended to control and reduce the costs of civil litigation.

The initial purpose of the insolvency exemption was to enable Insolvency Practitioners (IPs) to adjust to the changes and make alternative arrangements for litigation funding. R3 campaigned for a permanent insolvency exemption but unsuccessfully.

Lord Justice Jackson delivered a speech at the 2015 Mustill Lecture suggesting that the Government should end the exemption, and on 17 December 2015 the Ministry of Justice announced that the exemption would come to an end on 1 April 2016.

Many in the insolvency world would argue that insolvency litigation should be treated as a special case. It is not ordinary commercial litigation between parties on an equal footing. It is an attempt by an independent professional office holder to recover money for creditors who have been unfairly prejudiced by the actions of a director or third party.

Of course, if creditors want a claim to be pursued then they can fund the IP themselves, and/or provide a fund to protect against adverse costs – the claim is after all for their benefit. If creditors are not prepared to support a claim it could be argued there is no obligation on the IP to pursue it, and if they do so then it is at their own risk. However, in reality, for the majority of insolvencies there are unlikely to be creditors with sufficient financial interests, or sufficient available funds, to make this commercially attractive.

The true impact of the end of the recoverability regime will only become clear in time. The Government will be reviewing the reforms prior to April 2018, but it is highly unlikely the position will be reversed given the likely political and commercial pressures to reduce litigation costs. There is even the possibility of fixed costs being applied to claims worth up to £250,000 as called for by Lord Justice Jackson earlier this year.

IPs do have a number of options available to them in respect of litigation. There are now specialist insolvency litigation funders and, since 1 October 2015, certain office holder claims can be assigned, enabling IPs to make a realisation without the risk of litigating. IPs may need all options available to them to ensure that creditors continue to benefit from valuable claims.

The insolvency litigation landscape is changing, and although we think it unlikely that good claims against opponents with means will be stifled, a temporary dip at least in the number of cases brought by IPs seems likely.

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