The damage that civil litigation reforms could do to businesses when they are fully implemented has put the Department for Business, Innovation & Skills (BIS) on a collision course with the Ministry of Justice (MoJ).

Insolvency proceedings are subject to a temporary exemption from limits on contingency fee agreements placed by the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO). That exemption is set to be lifted in April 2015.

The original impact assessment had assumed that alternative funding arrangements would develop for insolvency cases. But for recovery of sums under £100,000 that has not occurred.

In answer to a written parliamentary question, BIS insolvency minister Jo Swinson accepted analysis by insolvency trade body R3, the association of business recovery professionals, that contingency fee arrangement-backed insolvency litigation realises £150m-£160m a year.

Swinson’s answer is the first admission by a minister that R3’s figures are credible. Previous discussions between R3 and the MoJ had hit an impasse, leading to the trade body, supported by the British Property Federation and several professional accountancy bodies, to appeal over the head of justice secretary Chris Grayling to 10 Downing Street.

The Law Society welcomed the letter.

Giles Frampton, president of R3, said: ‘While BIS has been making efforts to improve the position of creditors in insolvencies, the MoJ’s proposals contained in the LASPO Act will have the opposite effect.’

Insolvency practitioners told the Gazette that the credible threat of claims against directors in such lower-value claims were vital tools in ensuring recovery at the lowest possible cost.