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The implications that changes to LASPO could make to the insolvency industry

 

Posted on 10 August 2016

LASPO is the Legal Aid, Sentencing and Punishment of Offenders Act 2012. It was an Act put in place by Lord Justice Jackson to try to crackdown on the ‘Compensation Culture’ that had been growing in the UK, in order to better protect public funds and the public interest. The downside to this was that the reforms swept up all types of civil litigation, including insolvency litigation, despite it already achieving Lord Justice Jackson’s aims in protecting public funds and the public interest.

Insolvency litigation is a vital tool for recovering and returning money from rogue directors back to creditors. Up until April 2016, the Insolvency Profession has been exempt from this act, enabling it to litigate against the directors who commit fraud, are negligent or who wrongly take money out of a business. According to academic research it is estimated they could have walked away with almost half a billion pounds a year (£480m - up from £160m a year in 2013). This is money that is owed to creditors including small businesses and HMRC.

As from 6th April 2016 the government has announced the cessation of the exemption from LASPO for Insolvency Litigation. This has raised concerns with Insolvency Practitioners, with several suggesting that the changes are likely to be detrimental to returns made to creditors from some insolvent estates.

A recent survey of Insolvency Professionals revealed:

  • All of those surveyed felt that the changes would reduce the number of cases where a practitioner might be able to proceed with claims.
  • Over 75% felt that this would lead to an increase in unscrupulous or illegal behaviour by directors, who may now believe that the risk of action against them has been significantly reduced.
  • Almost a third of those surveyed felt that the cessation of the exemption would affect over 40% of cases where previously action would be taken.
  • It is believed that small and micro businesses are most likely to be affected.

The overall view is that whilst more companies will be able to access data regarding Directors and the companies they are dealing with more freely, the general landscape is uncertain. Some fear that the exemption will not negate the ‘no win no fee’ mentality and that the costs to creditors of putting through a claim could be greatly increased.

If you are uncertain of any issues from this legislation change, or simply need to speak to one of our Insolvency specialists please contact us via www.smithcooper.co.uk.

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