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LASPO: Insolvency Reforms Could Cost Creditors Millions

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The civil litigation reforms, and the potential damage they could do to businesses once they are implemented, has put the Department for Business, Innovation and Skills (BIS) in direct conflict with the Ministry of Justice (MoJ).

The Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) has placed limits on contingency fee agreements during insolvency proceedings, which trade body for Insolvency Professionals R3 have long argued will be costly to creditors by prohibiting litigants from reclaiming certain legal costs from defendants.

But last week BIS insolvency minster Jo Swinson accepted the analysis of insolvency take body R3 that contingency free arrangement-backed litigation makes between £150 million and £160 million per year for creditors. Swinson did so in an answer to a Parliamentary Question, which marked the first time a minister had accepted R3's figures as credible.

Prior to this, there had been severe disagreement between insolvency trade body R3 and the MoJ. The trade body then appealed to 10 Downing Street, a move which was supported by the British Property Federation and several professional accountancy bodies.

A temporary exemption to the provisions of the LASPO Act has been in place since April has been enacted. However, this exemption is set to be lifted in April 2015. The assumption that alternative funding arrangements would develop for insolvency cases before the exemptions were lifted - which the Government's original impact assessment predicted - has not materialised for recovery of sums under £100,000, which spurred Jo Swinson to cite the academic findings in her response.

Jo Swinson said: "When the exemption for insolvency proceedings was introduced in 2013, the impact assessment made the assumption that by April 2015 alternative funding arrangements would have been developed for insolvency cases. On that basis it was assumed there would be no major impact on the volume of insolvency cases which were pursued, or on the value of assets recovered in the long-run, although the risk of recoveries falling was acknowledged."

Giles Frampton, R3 president, said: "While the Department of Business, Innovation, and Skills has been making efforts to improve the position of creditors in insolvencies, the Ministry of Justice's proposals contained in the LASPO Act will have the opposite effect. It's encouraging that at least part of government is now acknowledging that the reforms could hurt creditors. It's not too late for the Ministry of Justice to think again about what it's proposing.

"The Government's assumption was that an alternative would be found by 2015 and so the Act would not hurt creditors. The same report which quantifies the loss to creditors of £160m per year clearly outlines that there is no alternative to the current, temporary exemption that would help creditors in the same way", Mr Frampton added.

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