The government’s decision to remove no-win, no-fee legal funding arrangements for creditors of an insolvent company is set to take £500m out of the hands of honest businesses and put it into the pockets of rogue directors.

The insolvent company litigation reforms, which are due to come into effect from next April, are designed to address the high costs of litigation in England and Wales. However, it is feared that making creditors fund the cost of insolvency legal battles will simply damage the finances of small businesses and reduce the public purse.

The move has been criticised by insolvency lawyers who often act for an insolvent company.

Creditors have often used the no-win, no-fee arrangements to fund legal claims against rogue firms that go bust and leave a devastating trail of debt behind them.

Critics of this type of funding method say it prompted a huge number of spurious claims in personal injury cases, but insolvency lawyers believe the removal of this type of arrangement in insolvency cases is a step in the wrong direction. They warn the removal of the current arrangement will prevent HMRC from recouping unpaid taxes, thereby reducing the public purse.

The move will also act as a deterrent to creditors wishing to make a claim, and give fraudulent directors a further incentive to withhold creditors money, as it will become increasingly unlikely they’ll be taken to court.

The announcement amounts to a ‘rogue’s charter’

Richard Wolff, the North West Chair of the insolvency industry trade body R3, believes the loss of the effective use of no-win, no-fee funding arrangements amounts to a rogue charter. Conditional fee arrangements are commonly the only way creditors can pay for legal action as there are rarely any funds left in corporate insolvencies to cover the costs.

Insolvency practitioners regularly use the current funding arrangement in cases where company directors have been involved in suspected acts of wrongdoing or fraud. In 2014 alone, no-win, no-fee legal arrangements were used by insolvency professionals to retrieve an estimated £480m from rogue directors. This included £115m for HMRC.

The removal of no-win, no-fee legal agreements

No-win, no-fee legal arrangements were initially banned under the 2012 Legal Aid, Sentencing and Punishment of Offenders Act. However, after fierce lobbying from the insolvency industry, the government agreed to grant a two-year exemption in insolvency cases. This was extended in February this year following further pressure from industry bodies and MPs.

While a proportion of the funding gap this move creates could be filled by litigation funding, this will not help in the majority of cases where victims include SMEs and the taxpayer. The result will be a net loss for UK plc and the honest businesses that are simply trying to survive and grow.

“The only winners are the rogue directors”

Phillip Sykes, president of the insolvency trade body R3, said: “The government is potentially writing off hundreds of millions of pounds a year that’s owed not just to HMRC, but to hundreds, if not thousands, of ordinary honest businesses as well.

“The only winners are the rogue directors and others who refuse to pay money owed to creditors after an insolvency. We’re back to an uneven playing field, where rogue directors hold all the cards – and the cash.”

Mr Sykes was also critical of the government for failing to understand the full impact the move would have. It failed to answer or engage with arguments put forward by insolvency professionals, and did not carry out an assessment. The result will be a substantial funding gap that will deliver a real blow to honest businesses and the insolvency profession.

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