The Jackson Effect: Insolvency Practitioners act now!

A conditional fee agreement (“CFA”) is a legal funding arrangement whereby a client only pays its lawyers’ fees on the condition that the case is won. If the case is lost, no fees will be charged. If the case is won, the lawyer can charge their usual fee plus an additional success fee. The success fee was formerly payable by the opponent, together with any After the Event (“ATE”) insurance premium. ATE insurance policies are taken out to provide protection against having to pay adverse costs (the opponent’s costs) if the case is lost. Following concern about the impact of success fees and ATE insurance premiums on the cost of litigation, and further to recommendations in the Jackson Report, the government introduced the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”), which came into force in April 2013. The key reforms of LASPO are contained in sections 44 and 46 and provide as follows:

• Section 44 – removes the recoverability of success fees in CFAs; and
• Section 46 – abolishes the recoverability of ATE insurance premiums.

In response to these reforms, insolvency practitioners (“IPs”) argued that they would severely restrict the availability of funding to IPs seeking to recover assets of insolvent companies or individuals, as well as reducing the net recoveries available for distribution to creditors. As a result of subsequent negotiations, the government announced that it would exempt insolvency proceedings from the effect of sections 44 and 46 of LASPO for a two-year period, until 2015. This decision was set out in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No. 5 and Saving Provision) Order 2013 (SI 2013/77) (“Savings Order”), published on 18 January 2013.

The Savings Order provides that the sections of LASPO relating to recoverability of success fees and ATE premiums are excluded for proceedings relating to a claim for damages in respect of diffuse mesothelioma; publication and privacy proceedings; and proceedings in respect of, and relating to, insolvency.

Whilst the concession was welcomed by liquidators, administrators and trustees in bankruptcy, it fell short of the full exemption for which some had lobbied.

The government, in making a concession for insolvency proceedings, recognised that insolvency cases “bring substantial revenue to the taxpayer, as well as to other creditors, and encourage good business practice”. It was therefore hoped that the delay in implementing the funding reforms in insolvency proceedings would allow time for an alternative plan to be formed to allow the continuation of these cases.

Despite speculation that the insolvency exemption would become permanent, in September 2014, the government confirmed that it will end from 1 April 2015, with the effect that future insolvency proceedings will be treated in the same way as other forms of litigation. Accordingly, where an insolvency case is funded by a CFA and protected by way of ATE insurance, the success fee and ATE premium will be payable by the IP, notwithstanding a successful claim.

So, for IPs hoping to recover success fees and ATE premiums from your opponent, now is the time to set the wheels in motion and issue proceedings in advance of April 2015!

For further information regarding this topic, please contact Simeon Gilchrist or Sophia Mew. Alternatively, please contact us on t: 020 7691 4000 | e: info@edwincoe.com

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