In a written statement this morning from Lord Faulks QC, Minister of State for Civil Justice, the government has announced that, from April 2016, insolvency litigation will no longer be exempt from what have been abbreviated to “the LASPO reforms”. This means in practice that when insolvency practitioners want to bring claims against people such as directors who have been guilty of wrongful trading at the expense of the company’s creditors and parties connected with the company who have received funds they should not have had and/or taken money or assets out of the company without paying a fair value for them, they (the insolvency practitioners) will no longer be able to recover the full costs of their litigation from those parties. The announcement flies in the face of research which had made out a very strong commercial justification for retaining the exemption on a permanent basis, and which had demonstrated that the only beneficiaries of an end to the exemption are those who flout insolvency and company law.

This announcement will undoubtedly impact greatly not only on the ability of the insolvency industry as a whole to deliver substantial dividends to creditors including all of us as taxpayers via HM Revenue and Customs (and the research on this suggests that the lost returns will amount to several hundreds of millions of pounds, which will therefore stay in the pockets of people who by law should not be allowed to retain it) but also upon the level of deterrent which exists to keep directors and others who become involved with insolvent entities and individuals on the ‘straight and narrow’.

This announcement is the latest in a series of irresponsible blows which have been dealt to access to justice generally during 2015, including massive hikes in court fees and the reduction in the number and staffing levels of the county courts, but it is a blow which will deal collateral damage to the vast majority of victims of errant behaviour on the part of directors of insolvent companies, and on the part of bankrupt individuals. It will do this by effectively putting most recoveries under a certain threshold out of reach, thus creating a charter for the morally challenged to strip smaller companies and estates of monies without sufficient fear of the consequences for themselves. This is simply because in the vast majority of insolvencies there are insufficient funds to pay for litigation to recover monies and, understandably, those who can facilitate that litigation by deferring their own fees and premiums (the insolvency lawyers and ATE insurance providers) expect to be paid at a level which reflects the size of the risk they are taking on in the process. If only a proportion of those fees, and none of those insurance premiums, can be recovered from the unsuccessful opponent, they will instead eat up a disproportionate amount of any recoveries. It is simple economics, subject to masses of evidence, which the government has seemingly chosen to disregard.

To be fair, it has not been all plain sailing for directors this year either, with the reversal of the burden of proof for wrongful trading by caselaw in the Summer and the advent of assignability of officeholder claims in October (which should have sent a number of directors by now running for their insurance brokers to set up or improve their Directors and Officers’ insurance), but these things impact upon all directors, the vast majority of whom are of course responsible and honest. Today’s announcement only alleviates these burdens for the irresponsible and dishonest. The combination of these factors probably means that what we will see in 2016 are:

  1. A somewhat unseemly rush by insolvency practitioners to issue claims they have been looking at by April 2016 (some of which may not yet have been fully investigated, so inevitably some defendants will face claims which could have been avoided if there had been time to complete those investigations and to investigate alternative means of resolving any disputes without litigation);
  2. A further growth in the number of cases taken on / underwritten by professional assignees / corporations set up to assess and purchase such claims (of course at a value which will offer them a sufficient commercial return to satisfy their shareholders, meaning that smaller claims will often be overlooked) and/or a growth in claims handled by IPs and solicitors at larger and/or more expensive firms who are geared towards undertaking a great deal of contingent work; and
  3. A trend whereby only cases of significant value (say £75,000+) are sufficiently viable to run in most insolvency situations, such that your average company director or bankrupt will (so long as s/he does not flagrantly breach the criminal law) will be able to act realistically fearing nothing but the prospect of a directors’ disqualification within 3 years (and the unlikely prospect of a compensation order being attached to that) or a bankruptcy discharge suspension or restriction order.

This news compounds the existing difficulty IPs and their legal teams already face obtaining justice for creditors in the face of increasing regulation and decisions of our under-resourced courts such as one we attended recently where a Registrar ruled (on an ambush point only taken at trial and not even referred to in skeleton arguments) that a preference payment made by a director from company funds on the very morning of an administrator’s appointment was not made ‘at a relevant time’, whereas if it had been made at 11:59pm the previous day it would have been. Such a decision, which would arguably create a lacuna and charter for directors to clear the company’s bank accounts to pay their mates so long as they leave it to the last possible moment, is of course eminently appealable, but the problem is that scarcely anyone has the funding or time available to pursue such appeals, meaning that (unless there are very large sums in issue) justice plays second fiddle to financial considerations.

All in all, 2015 has unfortunately, and largely as a result of government policy, been a much worse year for creditors than for those responsible for debt. This threatens to undermine the reputation of the British economy as boasting one of the fairest and most effective insolvency regimes.