East Anglia: End of ‘no win, no fee’ legal funding will benefit rogue directors, claims R3

Frank Brumby, eastern region chairman of R3.

Frank Brumby, eastern region chairman of R3. - Credit: Archant

Rogue company directors will be the main beneficiaries of Government legal reforms due to take effect next year, according to a leading figure in the eastern region insolvency sector.

Frank Brumby, regional chairman of R3, the trade body for insolvency professionals, says the extension of a drive against “no win, no fee” funding arrangements to insolvency litigation from April 2015 will make it harder to pursue directors of failed companies who have committed fraud or behaved recklessly.

The Government launched a crackdown on “no win, no fee” arragements in response to concerns that they were driving up insurance premiums and leaving organisations such as local authorities and hospitals exposed to high legal costs.

Insolvency-related claims were among three types of case initially excluded, in order to allow time for alternative funding mechanisms to be found, but the exemption for insolvency is due to end next April, despite complaints from R3 and other groups that no workable alternative has been devised.

”From April 2015, insolvency litigation will no longer be exempt from the crackdown on ‘no win, no fee’ legal funding,” said Mr Brumby, a director at Isadore Goldman.

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“Crucially, this type of funding is often the only way that court cases can be pursued to retrieve money from rogue directors that have wrongly taken money out of a failed business.”

R3 cites a study by the University of Wolverhampton, published earlier this year, which found that insolvency practitioners currently pursue up to £300million a year of creditors’ money using no win, no fee funding, with more than £160m being returned as a result.

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It also says the current system encourages directors to settle early to avoid expensive court cases and deters directors from taking money in the first place. However, the University of Wolverhamption report found that 90% of pre-court settlements not have been completed without the threat of creditors recovering the court costs from the director.

“Quite rightly the Government has stressed the importance of cracking down on directors who misbehave, but it’s these directors that will be the big winners from the end of insolvency litigation’s exemption. Creditors, including the taxpayer and small businesses, will be the ones who lose out,” added Mr Brumby.

“Without ‘no win, no fee’ funding, insolvency litigation will become unaffordable for all but the largest creditors. Rogue directors won’t believe their luck.”

Justice Minister Lord Faulks said: “Our changes to no win no fee deals have tackled the soaring costs of court cases which have driven up insurance premiums at a cost to individuals and businesses.

“We delayed bringing the law in for insolvency proceedings to allow the industry time to adjust. We expect firms who use no win no fee agreements to adapt to the new way of working as businesses in other areas have.”

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