The Independent View: Ministry of Justice costs reforms undermine Vince Cable’s aim of tackling rogue directors

Statue of Justice - The Old BaileyA key message the Business Secretary Vince Cable has been keen to stress during his time in government is the need to tackle rogue directors: he’s announced plans to produce “stronger deterrents” and “more robust sanctions” to quash ‘dodgy directors’. Dr Cable’s – and insolvency minister Jo Swinson’s – policies on protecting creditors from rogue directors are certainly worth developing, but they are at risk of being undermined by policies being put forward by the Ministry of Justice.

The Ministry of Justice has been seeking to tackle the costs of litigation, but its reforms will end up having a big impact on the insolvency profession’s ability to combat rogue directors and will have disastrous and costly consequences for small business creditors and the taxpayer.

Insolvency was, in fact, granted an exemption from the wider reforms in 2012. However, with the MoJ keen to ensure that reforms are ‘consistent’, this exemption expires in April 2015. Only a permanent exclusion to the changes would potentially prevent funds from falling into the hands of rogue directors and ensure creditors – including small businesses and the taxman – are not exposed to people who are responsible for business failure.

What is being proposed is that insolvency litigation be included in the clampdown on costs associated with ‘Conditional Fee Arrangements’ and ‘After The Event’ Insurance (ATE). Effectively, insolvency cases will no longer be able to be funded on a ‘no-win, no-fee’ basis.

However, R3 and creditor groups believe the insolvency exemption is necessary because using ‘no-win, no-fee’ agreements is often the only way an insolvency practitioner can fund legal action to reclaim creditors’ money from a director.

Insolvency practitioners sometimes come across an insolvent estate where there is little or no money to return to creditors because the business’ director or owner or a third party has misapplied it. With no money available in the estate to fund a legal case to retrieve the money – and with the creditors already out of pocket and unwilling to stump up more money – the only way for insolvency practitioners to fund a case is to reclaim the CFA and ATE costs from the director they’re pursuing in the event of a successful case. It’s this ability to reclaim these costs that is set to be blocked.

These premiums and uplifts are substantial and smaller cases would become uneconomic if they were to be irrecoverable; there is no point in commencing an action when the fruits of the claim are likely to be absorbed by costs.

The Government may be keen to crack down on ‘rogue directors’, yet its commitment to undermining a most effective tool for combatting bad behaviour by directors, flies in the face of its stated policy. R3 and creditor groups have written to the Prime Minister and the Justice Secretary to highlight our concerns.

These concerns are backed up by data and are not just ‘finger in the air’ predictions. According to a report by professor Peter Walton of the University of Wolverhampton (commissioned by R3 and others), insolvency practitioners pursue up to £70 million every year that belongs to HMRC and taxpayers, with another £230 million belonging to businesses pursued too. The report estimates that over £150 million is successfully claimed every year.

The threat of having legal costs reclaimed from them also encourages directors to settle cases – saving money, as the Jackson reforms intended.

The changes fly in the face of the original premise of reducing the costs of civil litigation, not to mention the likelihood of millions of pounds not being returned to its rightful owners.

I hope the Government and Dr Cable come to realise that this policy would be detrimental to their crackdown on rogue directors and would consequently aid the efforts of those whom they are trying to deter.

The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers. Please email [email protected] if you are interested in contributing.

* Giles Frampton is President of the Insolvency Practitioners' trade body R3

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This entry was posted in Op-eds and The Independent View.
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One Comment

  • So, if I’ve got this right the MoJ is making reforms to clamp down on litigation costs generally but recognised back in 2012 that the particular method chosen for most types of litigation simply wouldn’t work in the specific case of insolvency litigation and allowed practitioners to continue with the established system.

    Fast forward two years and civil servants (and/or the Minister?) at the MoJ are so concerned to ensure a ‘consistent’ approach (a.k.a. ‘one size fits all’) that they now plan to standardise the rules even though doing so removes the practical possibility in many (or most?) cases of either (a) recovering creditors’ money, or (b) pursuing directors who have committed fraud of some sort.

    If that’s a correct reading of this then this is a powerfully ‘criminogenic’ measure – that is it will promote criminality by removing effective sanctions against rogue directors. It doesn’t take a genius to work out that this will rapidly cost all of us a fortune. And all this so the tidy-minded dolts at the MoJ can have a one-size fits all policy.

    Can we have a government that knows how to govern! And an opposition that can score when presented with an open goal.

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