Government acknowledges £160m cost of Jackson reforms to creditors

The government has recognised that creditors in insolvencies could lose up to £160m per year from as a result of LASPO.

The LASPO Act has been subject to much debate and criticism, with the government recently losing a judicial review over its handling of a decision to remove an exemption from the legislation for litigation relating to mesothelioma cases, and MPs on the Public Accounts Committee recently criticised the Ministry of Justice for failing to properly consult on £300m worth of legal aid cuts.

Business groups have argued that the Act will make it harder to return money to creditors from directors and third parties after insolvency.

In response to a parliamentary question from Toby Perkins MP about the impact of the reforms on financial redress for creditors, insolvency minister Jo Swinson said: "Insolvency trade body, R3, commissioned research to try to measure the impact of civil justice reforms on insolvency litigation. This research estimates that contingency fee arrangement backed insolvency litigation realises £150-160m per annum.

"When the exemption for insolvency proceedings was introduced in 2013 the impact assessment made the assumption that by April 2015 alternative funding arrangements would have been developed for insolvency cases. On that basis it was assumed there would be no major impact on the volume of insolvency cases which were pursued, or on the value of assets recovered in the long-run, although the risk of recoveries falling was acknowledged."

The president of R3, Giles Frampton said: "While the Department of Business, Innovation, and Skills has been making efforts to improve the position of creditors in insolvencies, the Ministry of Justice's proposals contained in LASPO will have the opposite effect. It's encouraging that at least part of government is now acknowledging that the reforms could hurt creditors. It's not too late for the Ministry of Justice to think again about what it's proposing."

Frampton continued: "What is particularly frustrating is that the Ministry of Justice has still failed to carry out a full impact assessment of the Act's likely effect on insolvency, and appears to be ploughing on regardless. Insolvency litigation is very different to the types of legal case the Act was designed to tackle. In fact, insolvency litigation achieves everything the reforms were designed to protect."

LASPO prohibits litigants from reclaiming certain legal costs from losing defendants under the 'Jackson' reforms. In insolvent estates there are little or no funds to pursue actions against directors, bankrupts, or third parties. Many businesses believe it is therefore necessary to insure the office holder and to pay a contingent success fee to the lawyers because of the risk of losing. R3 argue that a prohibition on recovering these costs from a losing party would make many cases uneconomic to pursue.

Insolvency litigation was exempted from the Act until April 2015 to allow time for an alternative mechanism for funding insolvency cases to be found. However, creditors and the insolvency profession say no alternative funding mechanism would generate the same results for creditors.

Frampton added: "The government's assumption was that an alternative would be found by 2015 and so the Act would not hurt creditors. The same report which quantifies the loss to creditors of £160m per year clearly outlines that there is no alternative to the current, temporary exemption that would help creditors in the same way."

John van der Luit-Drummond is legal reporter for Solicitors Journal