September 29, 2014

Corporate insolvency – litigation

In 2012, the (LASPO) Act reformed the UK civil litigation costs and funding regime. The reforms were proposed by Lord Justice Jackson and aimed at tackling legal costs that are disproportionate to the value of some legal claims.

The government agreed to a two year exemption for insolvency litigation from April 2013 to April 2015. However, they have announced that they do not plan to extend the period of insolvency exemption to the reforms for litigation past April 2015. This is expected to reduce the net recoveries available for distribution to creditors as IP’s (and their lawyers) may become averse to certain recovery litigation.

At the moment, Insolvency Practitioners (IPs) commence litigation on behalf of creditors against company directors or other third parties whose actions have caused harm to a business, such as fraud.

Since many directors are found to leave insolvent companies with almost no assets and therefore no funds with which to investigate or fund litigation, IPs can instruct solicitors to recoup the monies on a Conditional Fee Arrangement (CFA) basis. IPs will then take out After The Event (ATE) insurance to cover any adverse legal costs.

Currently, IPs can recover the CFA success fee and any ATE insurance premiums from a losing defendant but after April 2015 the LASPO Act will remove the recoverability of success fees in CFAs. This will mean that, in future, legal fees will need to be taken from the insolvent estate and will therefore reduce the returns to creditors.

Insolvency litigation claims currently amount to an estimated £300m each year, many of them realising around £50,000 or less. However, if this area of the law does not receive permanent exemption from the LASPO Act, such claims are less likely to be pursued without CFAs and ATEs since costs will just be too high.

So the removal of the ability of an IP to use CFAs and ATEs in insolvency litigation is likely to have a significant effect on the decision of Insolvency Practitioners to pursue debtors after April 2015. If you have a claim against an insolvent company or you are an Insolvency Practitioner concerned about costs of litigation then our insolvency litigation lawyers can help, please visit or contact Ashok Patel or Stewart Wilkinson.

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