R3, the Association of Business Recovery Professionals, has today announced that it has won an extension from the Government of the temporary exemption of insolvency litigation from certain effects of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“the Act”). Provisions in the Act preclude successful litigants from recovering, as part of an order for costs against the other party to the claim, any success fee under a conditional fee agreement or the premium payable for after the event insurance. The provisions were brought in by the Government as part of the Jackson reforms and in the light of a widespread perception that excessive litigation costs, including success fees and insurance premiums, were being meted out to unsuccessful defendants to litigation, in particular the NHS in medical negligence cases.

When these provisions were brought in, the Government agreed a temporary exemption for insolvency litigation. The purpose of the exemption was to enable insolvency office-holders to continue recovering assets for the benefit of creditors of insolvency companies via litigation against former directors, where the insolvent companies were unable to fund the cost of such litigation. However the exemption was expressed to expire on 1 April 2015.

Business Recovery professionals, headed by R3, have campaigned to maintain the exemption, arguing that the valuable service that they perform in recovering assets for creditors of insolvent companies and holding former directors to account will be diminished without it.

Lord Faulks, on behalf of the Government, made the announcement today in a written statement, saying:

The Government has made a priority of addressing the high costs of civil litigation in England and Wales. To that end, Part 2 of the Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act 2012 reforms the operation of no win no fee conditional fee agreements. Those reforms came into effect generally in April 2013, but were delayed until April 2015 in respect of insolvency proceedings (WMS 24 May 2012: Column 94WS). This delay was to give insolvency practitioners and other interested parties time to prepare for and adapt to the changes. However, the Government now agrees that more time is needed. The Government will therefore delay commencing sections 44 and 46 of the LASPO Act 2012 for insolvency proceedings for the time being. Accordingly, no win no fee agreements in insolvency proceedings will continue for the time being to operate on a pre-LASPO Act basis with any conditional fee agreement success fees and after the event insurance premiums remaining recoverable from the losing party. We will consider the appropriate way forward for insolvency proceedings and will set out further details later in the year.”

Giles Frampton , President of R3 said

We are absolutely delighted by the government’s decision. Insolvency litigation brings back millions of pounds every year to small businesses and taxpayers owed money by negligent or fraudulent directors. This money would have been put at risk if insolvency practitioners lost their ability to use no-win, no-fee funding from April.

The decision is a big boost for the fight against business fraud and malpractice, and will help keep smaller creditors on a level playing field with those determined to withhold money from them.”

For further information please speak to Richard Baines, R3 Committee member and Head of Druces LLP’s Business Restructuring, Turnaround and Insolvency team and Julian Johnstone and Rachel Brown, of Druces LLP’s Litigation team.

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