Unless you have been living in a cave, you will have heard the very disappointing news that the current exemption to the Jackson reforms for insolvency claims under the Legal Aid, Sentencing and Punishment of Offenders Act (“LASPO”) will cease as of 1 April 2016.

If you are to avail yourself of the benefits of the Jackson exemption, which was one of the few pieces of legislation that levelled out the playing field between Insolvency Practitioners (“IPs”) and rogue directors – then read on.

All too often, by the time an IP is appointed over a company in liquidation or a bankrupt’s estate, the assets have been stripped, cash has been diverted and the only asset left in the insolvency estate are claims against the directors or related parties to refund the estate.

In order to litigate the IP would inevitably have to obtain after the event insurance (“ATE”) to cover the risk of an adverse costs order being made against them, and enter into a conditional fee agreement (“CFA”) with their lawyers to ensure that the lawyers would only be entitled to be paid in the event that they made a recovery on behalf of the IP. Under the LASPO exemption, in the event that the IP obtained judgment against a third party, the third party would be liable for the ATE insurance premium, as well as the lawyers’ costs (including any uplift) payable under the CFA.

Without the LASPO exemption, the balance of power in insolvency claims will lie with those that have wrongly stripped assets or cash from a company or insolvent estate, a recent case demonstrates this perfectly.

A recent example of the exemption in action: 

An IP was appointed liquidator of a company that had no material assets. His investigations showed that a director had taken an illegal dividend of £70,000. Demand was made of the director requiring him to repay the dividend.  As no offer was forthcoming, a Part 36 offer was made on behalf of the liquidator in the sum of £50,000. The director rejected the offer and made a counter-offer of £2,000, claiming that he had no funds, and if the offer was not accepted he would have no option but to declare himself bankrupt.  There were good grounds for believing that this was not true.

Proceedings in draft were served upon the director, with confirmation that ATE insurance had been lined up, but still no further offer was forthcoming.  It was only when we issued and served the proceedings, together with a Notice of Funding indicating that we were acting under a CFA backed with ATE that the director sought to settle the claim.

Within 2 days of serving the proceedings and the notice, the director queried whether the £50,000 Part 36 Offer was still open for acceptance. We confirmed that it wasn’t. Following brief further negotiations, the director agreed to repay the £70,000 dividend in full and made a significant contribution towards the IP’s costs. This is the same director who only a couple of weeks previously had claimed to have no assets with which to meet the IP’s claim.

This epitomises the rationale for the LASPO exemption, which the insolvency profession fought so hard to retain. The director has adopted an “if you want it, come and get it” approach, thinking that the IP didn’t have the appetite, or the means, to pursue the claim. However, once the potential costs consequences of a CFA backed with ATE were brought to bear against him, he settled in full. Without this exemption, the claim would not have been resolved in such short order, saving the IP significant cost (for the benefit of the company’s creditors).

Act now and protect your position

The LASPO exemption will still apply to all claims issued prior to 1 April 2016. It is therefore of the utmost importance that IPs examine their existing case load, and if there appear to be claims that have not yet been pursued, that you consider issuing proceedings prior to April 2016.

If you are not yet in a position to issue but you believe you have potentially good claims, all is not lost. You can preserve the strategic benefit of being able to recover the ATE premium and any uplift under a CFA, if you enter into those arrangements before 1 April 2016, and then subsequently issue proceedings. The task of IPs and insolvency litigators is tough enough; don’t lose the opportunity of levelling the playing field against rogue directors and individuals for the benefit of the creditors, whilst you still can.