Can The Dark Cloud of Insolvency Ever Have a Silver Lining?

Success fees and insurance premiums will continue to be recoverable in insolvency proceedings until April 2015 which may give rise to opportunities to pursue claims that could not otherwise be funded.

The Legal Aid, Sentencing and Punishment of Offenders Act 2012 received Royal Assent on 1 May 2012 and the Government has already announced that the provisions relating to civil litigation funding costs will come into force in April 2013, subject to two exceptions. The first is in relation to mesothelioma cases. The second is the so-called ‘Insolvency carve-out’ that exempts insolvency proceedings until April 2015.

This means that, until April 2015, success fees under conditional fee agreements (‘CFA’) and after-the-event insurance premiums will remain recoverable by the successful party to litigation. Clearly it would never be commercially justifiable (even if it were morally acceptable) to contrive an artificial insolvency simply to benefit from the terms of the carve-out. However it is sometimes the case that prospective claimants, especially those with professional negligence claims, find themselves close to financial ruin.

Such claimants, who are on the cusp of insolvency, may find it worthwhile considering whether they might be able to benefit from the carve-out. Even then, it may not be straightforward to engage the carve-out. A voluntary arrangement is typically the least invasive insolvency procedure but it seems unlikely that the carve-out will apply unless it is the insolvency practitioner (as opposed to the debtor) who acts as claimant. This may mean that causes of action have to be assigned from debtor to voluntary arrangement supervisor and that, in itself, can be fraught with difficulty.

Many claimants have relatively modest claims of less than £100k. CFAs may be the only affordable way to fund these claims but may be unattractive if, as is likely, they result in claimants facing the prospect that much if not all of the spoils of victory are likely to be absorbed by irrecoverable legal costs.

For those with few assets other than a strong claim (that cannot otherwise be funded), insolvency proceedings may be an option that solicitors advising prospective claimants need to consider. Then perhaps rule out, if only to ensure that they have given comprehensive and best advice.

As an accountant; Roger Isaacs specialises within business turnaround and business valuation.

Posted in Blog, The Forensic Blog.