Insolvency litigation will be subject to the costs regime imposed by the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) from April 2016, the Ministry of Justice confirmed today.
Justice minister Lord Faulks (pictured) announced that the exemption applying to insolvency will be lifted as the government addresses the ‘high costs of civil litigation’ in England and Wales.
The change in effect abolishes the recoverability of success fees and after-the-event insurance from losing defendants.
The announcement will come as a blow to insolvency practitioners who had lobbied the government to keep the exemption, suggesting that bringing insolvency into line with other civil litigation would prevent HM Revenue & Customs from recouping unpaid taxes and leave creditors with no way of getting back money owed.
Trade body R3, the Association of Business Recovery Professionals, slammed the government's decision as a 'half-a-billion payday' for rogue directors, citing research showing that the exemption helps retrieve about £480m owed to creditors from rogue directors and others every year.
President Phillip Sykes said: 'The government is potentially writing off hundreds of millions of pounds per year owed to not just HMRC, but to hundreds, if not thousands, of ordinary honest businesses as well.
'The only winners today are the rogue directors and others who refuse to repay money owed to creditors after an insolvency. We’re back to an uneven playing field, where rogue directors hold all the cards – and the cash.'
He added: 'At no point has the government engaged with the arguments in favour of extending the exemption, nor has it carried out an impact assessment of what the end of the exemption would mean.
'The end of the exemption leaves a huge funding black hole for insolvency litigation. This is a blow to the wider business community and the insolvency profession.'
Faulks also confirmed that a review of no-win no-fee reforms under part two of LASPO, which has to be made within three to five years of the April 2013 implementation date, will take place ‘towards the end of that period’.
This review will also consider whether to apply mesothelioma cases to section 48 of the act.
The insolvency exemption was originally to have been lifted in April this year but the government announced in February that it would put off the change.