The end of the insolvency exemption to LASPO

The insolvency exemption on the rules costs brought in by the Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act 2012 will be lifted from April 2016.

The exemption allowed insolvency practitioners (IPs) who succeeded in litigation to recover from an unsuccessful opponent their solicitors’ conditional fee agreement (CFA) success fee and the premium for any after the event insurance (ATE). With the exemption lifted, these costs will be borne out of the estate of the bankrupt or insolvent company.

Whilst the insolvency industry has criticised the Government’s decision, with R3, an influential industry trade body, stating that it will give rogue directors a “half a £billion payday” (please see article on R3 website), practitioners must now consider the way forward and the funding opportunities that remain available to them.

Firstly, the exemption will still apply to those cases where a CFA and/or ATE is obtained prior to April 2016. If practitioners believe they have a case in which it would be appropriate to enter into a CFA or seek ATE then this is something that should be explored as soon as possible. However, it would appear that a claim cannot lay in abeyance once the CFA/ATE is agreed, and therefore it is essential that steps are actually taken to prosecute the litigation.

Secondly, many litigation funders are mindful of the special nature of insolvency proceedings and there are now a number of innovative products available that can assist IPs in funding litigation at relatively low risk and cost.

Thirdly, the IP’s solicitor may agree to enter into a damages-based agreement (DBA), whereby the legal fees will be paid from any damages received from a successful claim. However, the difficulty with this option is that the underlying regulations governing the use of DBAs are widely criticised by the legal profession as being unclear and could lead to a DBA being challenged by a client further down the line.

Fourthly, there may be some situations when an IP can assign a claim to a third party. Rules brought in on 1 October 2015 allow liquidators and administrators to assign certain causes of action (including claims for fraudulent and wrongful trading), which could be helpful if the IP is unable to obtain funding or ATE or enter into a CFA.

Edwin Coe LLP is able to advise on all the options that are available, and therefore if you would like to discuss the above in any more detail please feel free to contact Ali Zaidi – Head of Restructuring & Insolvency, David Fendt – Associate, or any member of our Restructuring & Insolvency Team.

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