Lord Justice Jackson has urged the government to ditch one of the final exemptions to his civil justice reforms.
Speaking at the 2015 Mustill lecture in Leeds, Jackson (pictured) said the exemption for insolvency proceedings should not continue.
Jackson, whose reforms formed the backdrop to part two of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, said firms affected have had ‘more than enough’ time to prepare for changes.
In February, the Ministry of Justice said it would delay dropping the exemption - due to happen in 2015 - ‘for the time being’. A subsequent report of the likely effect of LASPO on insolvency litigation found many cases of recovery against rogue directors would not get off the ground if subject to the new rules.
But Jackson said the 2015 timescale for dropping the exemption should stand and described recoverability of after-the-event insurance and success fees - both scrapped in LASPO - as ‘an instrument of oppression, which is liable to crush defendants who have a good defence’.
He added that recoverability drives up the overall costs of litigation and that it would be ‘perfectly possible’ to bring insolvency litigation without the benefit of recoverability.
Jackson argued that those litigating using conditional fee agreements and ATE insurance had enjoyed a ‘windfall’ which created a ‘hopelessly unequal playing field’.
‘Many defendants in insolvency litigation backed by CFAs/ATE are individuals and often they are of modest means,’ he added.
‘It is wrong in principle to force all defendants in insolvency cases backed by CFAs/ATE to litigate at massive disadvantage.’
He suggested that only when LASPO is applied will the Insolvency Service take ‘proper steps’ to control litigation costs, and that neither insolvency practitioners or lawyers have ‘sufficient incentive’ to do so under the exemption.
‘It is in the public interest that the assets of insolvent companies and individuals be recovered by office-holders (who are strangers to the insolvent estate) for distribution to creditors, so far as this is lawful and possible.
‘There is also, however, a public interest in controlling litigation costs generally. Excessive litigation costs are wasteful of the nation’s resources.’
Jackson said this ‘insolvency carve-out’, which sets out a special set of rules for insolvency cases, subjects defendants to a ‘form of blackmail’ which drives them to settle early, even if they have good prospects of success.
Graham Rumney, chief executive of insolvency trade body R3, which has campaigned to keep the exemption, said many of the points raised by Jackson apply to the funding of litigation in general and not apply to the specific case of insolvency.
He said: ’Lord Justice Jackson fails to address the fact that it is ordinary creditors – from small businesses to HMRC – that benefit from the exemption. Without the exemption, creditors face seeing £160m of their money stay in rogue directors’ hands every year.
’Lord Justice Jackson talks about ‘levelling the playing field’; in reality, it is the exemption that levels the playing field. Without it, directors, bankrupts or third parties have no incentive to return money to creditors that they have wrongfully taken. They can act with impunity.’