Keeping the endings in sight

The Jackson reforms are designed to tackle problems in relation to civil ­litigation costs. One of their focal points is in relation to conditional fee arrangements (CFAs) and after-the- event (ATE) insurance. They propose that CFA ’success fees’ and ATE premiums should no longer be recoverable from the losing party in civil litigation. This should curb claimants’ costs. However, this will also have a significant impact on litigation conducted by insolvency practitioners.

This will mainly come about in cases where there are no funds available to pursue claims and the legal team is engaged under a CFA with ATE insurance cover in place to mitigate against the risk of any adverse costs awards. The fact that lawyers are able to claim a success fee on their standard charge-out rates has encouraged them to undertake such work in circumstances where they risk being paid nothing if the litigation is unsuccessful or insufficient assets are recovered to pay those fees.

If the proposals become law in their current form, success fees and ATE premiums will no longer be payable by the defendant. That will not prevent lawyers being engaged on a CFA, but will mean that some of the cost of those lawyers and insurance will be paid from the recoveries made rather than by the defendant. The effect is that the net proceeds of the litigation will be reduced, with the benefit to creditors also affected.

That will reduce the overall value of some claims and may make ­certain cases unviable. This could mean delinquent directors, who have obtained property or other assets to which they are not entitled, will ’get away with it’.

What the reforms fail to appreciate is that insolvency litigation is a specialist field and there are other policy rationales for bringing claims, which means the proposals relating to CFAs and ATE premiums should not be implemented in the same way as in personal injury or general commercial litigation cases. There is a good argument that relatively high costs incurred in insolvency claims should be recoverable from defendants as a matter of policy, because the effect of those costs not being recoverable means that claims may prove unviable. That could lead to a decrease in standards of corporate governance, since insolvency practitioners will be less effective at pursuing claims and the deterrent to individuals against committing acts that a liquidator or trustee would be likely to investigate and pursue will be reduced.

The deadline for implementation of the reforms has been set for April 2012, but it is generally believed that they will not be implemented fully before the end of this year. But there is still the prospect that they might be amended for insolvency claims. R3, the association of business recovery professionals, is in the process of ­lobbying the Government in relation to their impact on insolvency cases.

A proposed amendment was submitted recently, which suggested a carve-out so that CFA success fees and ATE premiums would still be ­recoverable from defendants in ­insolvency litigation cases. Our understanding is that the amendment was not initially well-received; however, it is continuing to be debated and there may be some prospect that a carve-out will be adopted.

The final wording of an amendment remains to be seen, but any amendment would be beneficial and it will be important to monitor developments over the next few months.