January 14, 2016

Legal Update: Recovery of CFA success fee & ATE premiums by Insolvency Practitioners to be withdrawn

In a statement to Parliament on 17 December 2015 the Under Secretary of State for Justice Dominic Raab MP announced that the Government would not be renewing the exemption to sections 44 and 46 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LAPSO”) that applied exclusively to Insolvency Practitioners. This means that from April 2016 it will not be possible for Insolvency Practitioners, who pursue litigation on behalf of a company or individual, to recover  success fees payable to their lawyer under a Conditional Fee Arrangement (“CFA”); or the premium that is payable to an insurer who is providing After-the-Event legal costs coverage.

Traditionally Insolvency Practitioners have instructed lawyers to pursue court action against debtors, directors or third parties on their behalf on “no win, no fee” or discounted fee terms. An additional “success fee” was payable to the lawyer in the event of a successful outcome as consideration for taking on the risk of acting on these terms. This would often be coupled with a requirement that the lawyer also arrange After-the-Event insurance cover against possible adverse costs ordered against the Insolvency Practitioner if the claim was lost. This afforded a great deal of protection for Insolvency Practitioners and gave them considerable comfort in bringing claims on behalf of the insolvent company or business.

Before April 2016 the success fee and premium could be recovered from an unsuccessful opponent as part of a costs order. However from April 2016 onwards these additional liabilities will not be recoverable from the opponent and they will therefore have to be paid by Insolvency Practitioners out of recoveries made in the insolvency or even personally, as the case may be.

R3, an association for Business Recovery Professionals, had long lobbied Government for the extension of the LAPSO exemption on the basis that many necessary court actions will not be financially viable for Insolvency Practitioners to pursue without being able to recover the additional liabilities from a losing opponent. A report commissioned by R3 from the University of Wolverhampton and published in December 2015 revealed that the exemption directly contributed to the recovery of £480m owed by debtors of insolvent companies last financial year (2014/2015) and that in 2014 claims that were backed by CFAs worth £1billion were commenced. The report also confirmed that 86% of those consulted believed that the end of the exemption would lead to less money being returned to creditors and 49% said they would stop or decrease the number of recovery claims they are prepared to bring against debtors.

In light of these developments Insolvency Practitioners are encouraged to sign up to CFAs for all potentially viable cases before April 2016. To facilitate this Royds offer a free consultation service to Insolvency Practitioners at which we will provide an outline view on the merits of your particular case and rapid confirmation as to whether we can offer CFA terms.  We are also able to arrange ATE insurance through policies directly aimed at the needs of Insolvency Practitioners and on competitive premium terms. We also have contacts with a number of Third Party Funders who may be prepared to acquire the rights of action outright, or fund litigation.

Royds litigation solicitors are experienced at working closely with Insolvency Practitioners and are always friendly and approachable.

If you are an Insolvency Practitioner considering taking legal action but are concerned at the imminent change in the law, please contact a member of our Insolvency Team by e-mail  or by telephone on 0207 583 2222 to discuss your needs. The Royds Insolvency Team are Stewart Wilkinson, Ashok Patel, David Bowman and Milan Kapadia.

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