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The government’s decision to prevent insolvency practitioners using ‘no win no fee’ arrangements to pursue money owed to creditors could result in half a billion pounds a year remaining in the hands of rogue directors, the insolvency trade body R3 has warned.

R3’s North West Chair Richard Wolff said he was ‘extremely disappointed’ by today’s announcement by the Ministry of Justice. Insolvency professionals regularly use ‘no win no fee’ arrangements to recover funds in cases of suspected wrongdoing or fraud. New research from the University of Wolverhampton shows that in 2014, this type of funding allowed the insolvency profession to pursue over £1bn owed to creditors and successfully retrieve around £480m, including £115m on behalf of HMRC.

Richard Wolff, who is also Head of Corporate Recovery and Insolvency at law firm JMW, said: “The loss of the effective use of ‘no win no fee’ arrangements would seem to amount to a rogues’ charter. Fraudulent directors and others will now have an added incentive to withhold creditors’ money because it will be almost impossible to take them to court. It’s honest, ordinary businesses creditors and the taxpayer that will lose out.”

‘No win no fee’ arrangements were banned under the 2012 Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act although the insolvency profession was granted a temporary exemption, which was extended in February this year following pressure from industry bodies and North West MPs. However R3 believes the government has not assessed the impact of any changes.

Richard Wolff added: “Conditional fee arrangements are often the only way to pay for legal action as there are often no funds left in an insolvency case. The Ministry of Justice has indicated that it expects third party funding to fill the gap, but the most difficult cases involving fraudulent directors or organised crime are likely to be unsuitable for this type of funding and it is these cases which recover the largest amounts.

“The value of insolvency litigation has grown significantly in recent years. If the government is trying to boost tax revenues, it’s hard to see how it can justify losing up to £115m a year.”

According to the research, approximately 160 cases per year use third party funding, realising £45m – compared to a total of approximately 2,300 ‘no win no fee’ cases per year which recover around £480m.

R3 is one of ten business groups that have campaigned for the insolvency exemption from the LASPO Act to be made permanent. Other groups include ACCA, the Association of British Insurers, the Bar Council, the British Property Federation, the Chartered Institute of Credit Management, the FSB, ICAEW, ICAS, and the Insolvency Practitioners Association.