Creditors – including HM Revenue & Customs – could lose more than £150m a year if the government applies the Jackson reforms to insolvency cases, a new report claims.
Research commissioned by R3, a trade body for insolvency professionals, found litigation currently brings in £300m a year from insolvent businesses.
Of this, up to £70m relates to money owed to HMRC, with the rest owed to businesses.
The report found the majority of claims relate to cases worth less than £50,000, which are unlikely to be pursued if success fees and ATE insurance premiums have to be paid out of any damages awarded, as stipulated by the Jackson reforms, which came into force last April.
CFA-backed insolvency litigation currently realises around £150m every year, the report added.
The government had exempted insolvency claims from the Jackson reforms but plans to apply the new rules from next April.
Philip Sykes, deputy vice-president of R3, accused the government of ‘lazy thinking’ by applying blanket rules to every type of litigation. ‘Insolvency litigation is absolutely in the public interest, and it is absurd that the government is considering making it all but impossible for such cases to continue,’ said Sykes.
‘The government’s only justification for ending the exemption is that it would make the Jackson reforms consistent across the board, regardless of the consequences.’
Sykes said the threat of having costs recovered from directors encourages them to settle cases before they reach court, reducing legal fees and ensuring higher returns for creditors.
Without the threat of recoverable costs, he warned, directors will know creditors cannot afford to take the case to court to retrieve funds.
He added: ‘Insolvency litigation returns money to creditors, and helps ensure businesses and banks remain confident about lending. It protects taxpayer funds, it stops directors making off with money that isn’t theirs, and it deters directors from even thinking about doing so in the first place.
‘Should the exemption be removed, only a few large cases involving wealthy, motivated creditors would go ahead. SMEs and taxpayers would lose out – and irresponsible directors would be laughing.’
The report, by Professor Peter Walton of the University of Wolverhampton, was commissioned by R3.
It had the support of the Association of Chartered Certified Accountants, the Insolvency Practitioners Association, the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants Scotland, claims specialists JLT Specialty, solicitors Moon Beever, and accountants Moore Stephens LLP.