On 17 December 2015, the Minister of State for Civil Justice announced that the no-win-no-fee reforms applied to other legal proceedings with effect from 1 April 2013 will be applied to insolvency proceedings, from April 2016.
It was stated that the provisions contained within Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) were made as part of the government’s priority of addressing the high costs of litigation in England and Wales.
It had already been announced that there will be a Post Implementation Review of the LASPO Act Part 2 reforms between April 2016 and April 2018, although it is anticipated this will take place towards the end of that period.
So, what does that mean?
A cynic would say that those directors who have run their companies down to the position where they have no available assets and substantial liabilities, will now be able to sleep sound in the knowledge that no liquidator will pursue them because of lack of funds and the inability to take advantage of CFAs (Conditional Fee (also know as no-win-no-fee) Agreements, and ATE (After The Event) insurance to protect them against adverse costs awards in the event that they lose the case.
To a certain extent, that may be true, but not necessarily in all cases.
An insolvency practitioner is still able to assign actions and there are a number of organisations who will take on those cases, paying an initial assignment fee. They will take all the risks of litigation and meet all of the costs involved. In return, they will require a percentage of the net recoveries after costs (often a substantial percentage). However, they will apply strict criteria in deciding which cases to take an assignment of, which will almost certainly result in some delinquent directors getting off scot-free
Where an assignment is taken, The insolvency practitioner will still have to carry out the same amount of investigation work and assist the solicitors instructed by the assignee. The solicitors will also have to do the same amount of work although admittedly they will not be able to apply a success uplift. Where the action is successful, the defendant will still have to pay the legal costs of the winner, or at least a part of them and his own costs. The funds awarded will be paid to the insolvent company and the assignee in accordance with the assignment agreement.
It seems that the net result will be a smaller recovery from delinquent directors, since they will be making a contribution to the winner’s lower legal costs, but the net recovery available to creditors will be reduced by the amount payable to the assignee, which would not be recoverable. In most cases this is likely to result in less money being paid to creditors. We can see therefore how the government’s decision will achieve the result of lowering the costs of litigation, but quite how that will improve the position of creditors of insolvent companies escapes us.
There is now a further remedy against delinquent directors in that from 1 October 2015, any directors who are disqualified may be personally responsible for any losses to creditors that occur as the result of any misconduct on the part of the director that takes place after 1 October 2015. Sounds pretty good but as you may expect, there is a sting in the tail. More about that here.