Following the reforms to civil litigation funding and costs in England and Wales (through the Legal Aid, Sentencing and Punishment of Offenders Act 2012) it is no longer possible to pass on the cost of alternative funding arrangements to the other side at the end of litigation. Parties are now required to bear those costs themselves.
What are the changes?
The changes meant:
- Whilst ‘no win no fee’ conditional fee arrangements (CFA) are still available, the success fee and insurance premiums can no longer be recovered from the losing side; and
- ‘No win no fee’ damages based agreements (DBA) are now available but the amount payable under the DBA is capped at 50% of the amount ultimately recovered.
What does this mean for me?
The effect of the changes for insolvency practitioners is that the amount of money realised for creditors will be reduced. This is likely to result in a reduction in the availability of funding for insolvency practitioners seeking to recover assets of the insolvent estate where there are little or no funds in the estate to cover the costs of litigation.
After extensive lobbying it was announced that these changes would not apply to insolvency proceedings until 2015. “Insolvency proceedings” includes proceedings brought by liquidators, administrators and trustees in bankruptcy to recover the assets of the insolvent estate.
Despite further lobbying by the insolvency industry to maintain/extend the exemption past 2015, it was reported on 15 September 2014 that the government does not propose to extend the exemption.
This is disappointing news for the industry since without the ability to recover costs fully, insolvency proceedings are likely to be unaffordable in most cases and act as a disincentive to litigating, even when they may have a strong case.
Alternative Funding Options
- Third Party Funding: There are a number of third-party funders that will finance insolvency proceedings in return for a portion of any damages awarded by the courts. However, the funder may take a large percentage of the proceeds of any successful action (up to 50%) and it is likely that most will only take on a very small percentage of cases offered to them where the potential value and prospects of success are very high. So smaller, low value cases will probably not be pursued. That said, the funding market is in its infancy and it remains to be seen whether they may expand to take on more cases
- Damages Based Agreements: Solicitors now have the ability to agree that their fees are contingent upon the success of the case. These are determined as a percentage of the compensation received by the client (capped at 50% (including VAT and counsel’s fees) of the amount recovered). These types of agreements have not been readily adopted in insolvency proceedings. This is largely due to the conflict between an insolvency practitioner’s duty to creditors to realise assets taking reasonable care against potentially having to pay to his solicitor a large proportion of those realisations under a DBA. It may be that ultimately they are only really a viable option where the claim is relatively weak and there is no other alternative funding available.
- Modified after the event insurance: Some ATE insurers have launched new funding products which include outset, deferred, staged and contingent payment options which may be more attractive.
For more information, help or advice please contact Kelly Jordan on 0191 211 7899.