Member Article

North East trade body calls for Government to scrap costly insolvency law reforms

A North East insolvency expert is calling for planned legal changes which would end up costing the creditors of insolvent firms over £160 million per year to be scrapped.

Allan Kelly, chair of insolvency trade body R3 in the North East and a restructuring partner with Baker Tilly North East, has written, along with other regional R3 members, to all North East’s MPs to ask that new rules that are due to come into force next April under the 2012 Legal Aid, Sentencing and Punishment of Offenders Act are abandoned.

The changes in the Act, known as the Jackson reforms, will make it very difficult for insolvency practitioners to retrieve money for creditors from rogue directors as they will no longer be exempt from the wider crackdown on ‘no-win, no-fee’ legal funding.

Insolvency cases were originally temporarily exempted from the Jackson reforms to allow time for alternative funding mechanisms to be found, but despite a lack of alternatives, the Government still plans to end this exemption in less than six months.

As ‘no-win, no fee’ type of funding is often the only way that creditors can afford to pay for court cases to retrieve money from rogue directors that have wrongly taken money out of a failed business, such directors could end up being the unintended major beneficiaries of its removal.

R3 was one of six influential business groups who recently wrote to Prime Minister David Cameron and Justice Secretary Chris Grayling as part of a wider campaign on the same topic, with other signatories to the letter including the Institute of Credit Management, the British Property Federation and the UK’s key accountancy bodies.

According to a 2014 University of Wolverhampton report, insolvency practitioners currently pursue up to £300 million per year of creditors’ money using ‘no-win, no-fee’ funding, including up to £70 million owed to taxpayers, and over £160 million is returned every year.

‘No-win, no-fee’ funding is often the only way creditors and insolvency practitioners can pay for legal cases to retrieve money from directors, because the money that could have been used to fund cases has already been taken by directors.

Under the current system, successful claims see both creditors’ debts returned and the rogue director charged for the cost of the court case.

Allan Kelly said: “The Government has quite rightly stressed the importance of cracking down on directors who misbehave, but it’s these rogue directors that will be the big winners from the end of insolvency litigation’s Jackson exemption, and creditors, including the taxpayer and North East small businesses, will be the ones who lose out.

“The planned changes are anti-business, will increase tax avoidance and evasion, and will benefit directors of insolvent companies who have committed fraud or behaved recklessly - rogue directors won’t believe their luck, and insolvency litigation will become unaffordable for all but the largest creditors.

“The Government’s commitment to ending the exemption is misguided - the decision flies in the face of the available evidence and there has been no impact assessment on insolvency litigation.

“The present system also encourages directors to settle early to avoid expensive court cases and deters directors from taking money in the first place.

“Insolvency litigation does everything the Jackson reforms were designed to protect - it’s in the public interest, it keeps legal costs down, and it protects public funds.

“It makes no sense for the exemption to end, and it is imperative that the Government listens to those of us who work with the creditors of insolvent businesses on a daily basis.”

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