Ministry of Justice plans to apply the Jackson reforms to insolvency litigation could cost creditors as much as £150m, insolvency practitioners’ group R3 has warned.
Currently, insolvency litigation is exempt from the Jackson reforms. However, this exemption is due to be scrapped in April 2015.
R3 says this will adversely affect creditors since, once Jackson applies, insolvency practitioners will no longer be able to fully recover costs from directors of insolvent businesses and therefore legal action to reclaim money from unscrupulous directors will be unaffordable.
An independent report commissioned by R3, and conducted by Professor Peter Walton of the University of Wolverhampton, found that nearly 89% of the 83% of insolvency cases that settle before court would not do so without the exemption in place.
Phillip Sykes, deputy vice-president of R3, says: “The threat of having costs recovered from them encourages directors to settle before cases reach court.
“This means lower legal costs, lower insolvency practitioner fees, and higher returns for creditors. Without the threat of recoverable costs, directors know most creditors won’t be able to afford a lengthy court fight to retrieve funds. They will be much less concerned about the ramifications of taking money that isn’t theirs from a business.
“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.”
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