Lord Justice Jackson urges extension of his reforms to insolvency proceedings

In a lecture delivered on 16 October, Lord Justice Jackson has argued the case in favour of bringing insolvency litigation into line with other types of civil litigation, where CFA success fees and ATE insurance premiums are no longer recoverable from losing opponents: see the 2015 Mustill lecture “The Civil Justice Reforms and Whether Insolvency Litigation Should Be Exempt”.

When the Jackson reforms were implemented in April 2013, the government announced that there would be a two year delay for insolvency litigation, which meant that the pre-Jackson regime of recoverable success fees and ATE premiums would continue for proceedings brought by liquidators, administrators, trustees in bankruptcy, and companies in liquidation or administration. The exception was due to end in April 2015, and that was reported to be the government's intention as recently as September 2014 (see post).

However, in February this year, following lobbying by the Association of Business Recovery Professionals concerned at the impending end to the insolvency exception, the government announced that the exception would continue “for the time being” (see post). The announcement stated that the government would consider the appropriate way forward and set out further details later in the year. To date, we have seen no further indication of government policy on the issue.

Arguments in favour of the exception

In his lecture, Lord Justice Jackson summarised the arguments in favour of the permanent application of the insolvency exception, as set out in a report by Professor Peter Walton commissioned by the Association of Business Recovery Professionals. These include:

1. Insolvency litigation is typically brought against former directors, whose misconduct has squandered the assets of the now insolvent company.
2. It is usually brought for the benefit of creditors - including HMRC which is usually a major creditor, and therefore insolvency litigation is in the public interest.
3. Very often defaulting directors leave the company with little or no assets to fund litigation.
4. If insolvency litigation is backed by a CFA and ATE, this frequently pressurises the defendant into settling.
5. Many insolvency actions are brought to recover modest sums or against individuals of modest means, so without the benefit of recoverability it may not be practicable to pursue such claims.

Lord Justice Jackson's arguments against the exception

Lord Justice Jackson sets out four reasons for his opinion that the exception should come to an end:

1. The recoverability regime was principally designed to assist individual claimants of modest means, in particular those who ceased to qualify for legal aid in April 2000. The advantages gained for insolvency litigation were a windfall.
2. Recoverability is an instrument of oppression, which is liable to crush defendants who have a good defence, ie because the excessive costs burden can drive defendants to settle regardless of merit. This risk, Lord Justice Jackson argues, is particularly acute in insolvency litigation because (as Professor Walton says) many defendants are individuals and often they are of modest means, so are vulnerable to such pressure.
3. Recoverability drives up the overall costs of litigation, as neither insolvency practitioners nor the lawyers acting for claimants in insolvency litigation have sufficient incentive to control costs in circumstances where the claimants have no liability to pay those costs.
4. It is perfectly possible to bring insolvency litigation without the benefit of recoverability, eg by creditors funding claims in the traditional way, or via CFAs and/or ATE without the benefit of recoverability, or (in larger cases) by using third party funding, or DBAs.

Next steps

As Lord Justice Jackson accepts, the question whether the exemption should continue is a matter of policy for the government. The stated purpose of his lecture is to set out his opinion on the subject, together with the supporting reasons, so that those who disagree
can explain why he is wrong.

It is fair to say that the current position seems somewhat arbitrary, in that defendants are liable for success fees / ATE premiums in claims brought by companies that happen to be in liquidation or administration – even if the liquidation or administration has nothing to do with the cause of action against the defendant – but not where an identical claim is brought by a solvent company.

The question, of course, is whether the special character of insolvency proceedings justifies the distinction. Insolvency litigation is treated differently from other civil proceedings in a number of respects, including the ability of insolvency practitioners to assign claims vested in the insolvent company without fear of offending against the principles of champerty and maintenance (due to the statutory power for insolvency practitioners to sell the company property, which includes causes of action).

As noted above, in February the government stated that it would set out further details on its position later in the year. Presumably it will wish to take into account the points raised by Lord Justice Jackson in any further communication or announcement on the issue. It will be interesting to see how the debate proceeds.