The future of mesothelioma's lost exemption is up in the air

One of the Ministry
of Justice’s (MoJ)
key reforms in this parliament has been delivered through the Legal Aid, Sentencing and Punishment
of Offenders Act 2012 (LASPO): the Jackson reforms.

While the main thrust of
these reforms is intended to reduce the cost of civil litigation, most notably to curtail what
are seen as the excessive costs associated with conditional
fee arrangements (CFA) and after the event (ATE) insurance premiums in personal injury and medical negligence cases, LASPO in its current form is
a law with unintended and costly consequences for insolvency litigation.

While the changes have broadly been introduced to protect public funds, protect
the public interest, and limit rising legal costs, it is not clear whether the MoJ has fully considered the impact on insolvency litigation, where
the ability to recover ATE premiums and CFA uplifts
from the losing party may
fairly be seen as achieving
these aims.

Alongside defamation
cases and those relating to mesothelioma, insolvency litigation was granted an exemption from the Jackson reforms. However, with the
MoJ keen to ensure the reforms are ‘consistent’, insolvency litigation is set to lose its exemption in April 2015. Mesothelioma’s exemption ended in July 2014.

Anti-business

The government may think
this is consistent, but the
truth is that it’s anti-business. Bringing insolvency litigation into the Jackson reforms will simply make it unviable to litigate to retrieve creditors’ money from directors and
third parties and in many
cases, potentially leaving hundreds of millions of
pounds in the wrong hands.

The two-year exemption granted to insolvency litigation was designed to give the profession and affected government agencies time
to find a workable alternative,
but nothing as successful
as the current regime has materialised – yet the government still refuses
to budge.

However, the insistence on the rigid application of the Act
is coming under sustained attack. Although mesothelioma lost its Jackson exemption in July this year, in September the High Court ruled that the MoJ had failed to properly review this decision. The future of mesothelioma’s lost exemption
is now up in the air.

In essence, the problem with the Jackson reforms in relation
to insolvency is as follows: practitioners sometimes come across an insolvent estate where there is little or no money to return to creditors because the business’ director or owner, or
a third party, has misapplied it. With no money available in
the estate to fund a legal case
to retrieve the money – and with the creditors already out
of pocket and unwilling to stump up more money –
the only way forward is for insolvency practitioners to obtain funding for legal action including cover for adverse costs.

Since ATE premiums
and uplifts are substantial,
smaller cases would become uneconomical if they were to be irrecoverable; there is no point in commencing an action when the fruits of the claim are likely to be absorbed by costs.

Rogue directors

The government may be
keen to crack down on rogue directors, yet its commitment
to emasculating a most effective tool for combatting bad behaviour by directors flies
in the face of its stated policy.

According to a report by professor Peter Walton of the University of Wolverhampton, insolvency practitioners pursue up to £70m every year that belongs to HMRC and taxpayers, backed by the threat of fully recoverable CFA uplifts and
ATE premiums – another £230m belonging to businesses is also pursued. The report estimates that over £150m is successfully claimed every year.

Third-party funding may be available, but is likely to be of limited benefit in the low-value cases which form the vast bulk of current activity – 78 per cent of cases are in respect of claims under £100,000, according to the Walton report. Even for the cases where there is funding, defendants may be much less inclined to settle, dragging out cases, pushing up costs, and lowering returns to creditors.

One size does not fit all.
It is to be hoped that the government comes to realise
that granting insolvency litigation a permanent exemption from the LASPO Act is in the interests of both the public purse and the wider public. SJ