The government has made a surprise climb-down on banning no-win no-fee agreements for insolvency proceedings.

Justice minister Shailesh Vara (pictured) today confirmed the government will ‘for the time being’ delay applying the provisions of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 in insolvency proceedings. The exemption was due to be lifted in April.

The news will be welcomed by businesses who argued that placing restrictions on insolvency claimants would prevent creditors securing debt recovery from rogue directors.

But questions will be asked why the government has retained an exemption from LASPO after arguing for months in favour of applying it to insolvency proceedings.

The reforms, banning recovery of after-the-event insurance premiums and success fees from losing defendants, came into effect in April 2013, but insolvency proceedings and mesothelioma claims have remained exempt.

Vara, who last year argued in favour of applying LASPO to insolvency cases to ‘tackle excessive costs’ has now said the government agrees ‘more time is needed’.

In a written ministerial statement in the House of Commons, Vara added: ‘No-win no-fee agreements in insolvency proceedings will continue for the time being to operate on a pre-LASPO act basis with any conditional fee agreement success fees and after the event insurance premiums remaining recoverable from the losing party.

‘We will consider the appropriate way forward for insolvency proceedings and will set out further details later in the year.’

The exemption has been subject to a sustained campaign from business groups in recent months who have argued that unsecured creditors will lose out if they cannot pursue cases against insolvent businesses.

Earlier this week, seven business groups, including the Federation of Small Businesses and the British Property Federation, wrote to justice secretary Chris Grayling asking him to drop plans to extend LASPO in April.

Insolvency trade body R3 said today’s decision will protect £160m of creditors’ money a year that otherwise could have been kept by fraudulent or negligent directors or third parties.

R3 president Giles Frampton added: ‘Insolvency litigation brings back millions of pounds every year to small businesses and taxpayers owed money by negligent or fraudulent directors.

‘This money would have been put at risk if insolvency practitioners lost their ability to use “no-win, no-fee” funding from April.’

Shadow justice minister Andy Slaughter said: ‘The Labour party, insolvency professional bodies and lawyers in the field have been pointing out for three years that applying LASPO to insolvency cases gave a green light to fraud and would cost the Treasury millions.  

‘Now we have another humiliating climb down a month before the rules were due to change.’