Life beyond LAPSO – how the impact can be managed for smaller firms
As most of you will already be aware, the 2012 Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act reformed the UK’s civil litigation and funding regime by banning recovery of the uplift from CFAs and ATE premiums from a losing party. As of 1 April 2016, these changes will apply to all civil litigation (including insolvency litigation), meaning that CFA uplifts and ATE insurance will now come from any damages awarded. This will have two obvious results in insolvency claims: the amount available for creditors will be reduced and, given that the threat of litigation costs being borne by the defendant has been removed, there will likely be a reduction in the number of cases settling.
The impact on smaller firms
While the full effect of these changes is difficult to predict, arguably there may be limited impact on the ability of IP firms (small and large) to put–sue larger claims, clue to their higher ‘costs to damages’ ratio and the availability of third-party funding and/or CFAs where there’s a reasonable chance the uplift and any deferred ATE premium will be paid in full.
However, although the majority of larger claims may not be hugely affected by the end of the insolvency carve out, a large proportion of claims still fall into the £25,000 to £100,000 bracket, usually in estates with minimum assets to fund any litigation. In these cases, the level of damages awarded may not cover the costs of the CFA uplift, ATE and, of course, the IP’s costs. As a result, it is arguably the SPG community who will be the most affected by the Jackson reforms, because they will be unable to pursue these claims unless they find an alternative source of funding. While it is possible that the impact of the loss of the ‘Jackson exemption’ on SPG firms can be managed through the use of such alternatives, the extent to which they will ‘pick up the slack’ left by the loss of the exemption remains to be seen. SPG firms may wish to explore the following options:
Assignment of claims: administrators and liquidators have the power to assign the following types of claim: preferences, transactions at undervalue, wrongful trading, fraudulent trading and extortionate credit transaction. The ability to assign wrongful and fraudulent trading claims was granted under the Small Business, Enterprise and Employment Act 2015, the relevant provisions of which came into force on 1 October 2015. This is likely to be a growth area, particularly for the smaller claims seen by SPG members.
Nevertheless, members should be aware that once the claim has been assigned, unless he/she has no future upside in the claim, it is possible that he/she could continue to have an adverse costs risk. There is also the duty to ensure that the assignment route is the best route given all the circumstances.
Compensation orders: the government recently introduced these orders in the Small Business Enterprise and Employment Act 2015. It is an effective way of bringing justice to bear on cases that have proved hard to fund. Compensation orders give the courts the power to proportionately penalise the wrongdoer without any of the costs of litigation.
Creditor funding: encouraging creditors to fund the smaller claim litigation could also be a solution. In Australia, under s564 of the Corporations Act 2001 the Court can elevate the funding creditor’s unsecured claim in priority to other creditors in consideration of the risk assumed by that creditor. Here in the UK, a proportionate funding agreement may be entered into with a creditor/s.
Damages-based agreements (DBAs): the Damages-based Agreements Regulations 2013 came into force on 1 April 2013. A DBA provides for payment of solicitors’ fees, counsel’s fees and VAT by a client under a DBA, and is dependent on achieving defined success criteria based on a percentage of the sum recovered from the losing defendant. There are a few DBAs being written, but they have not had the level of support that was initially expected. This is partly because of uncertainty around the regulations, but more because solicitors can’t ‘mix’ the comfort of a CFA with the attraction of a DBA.
Litigation funding: the cost of money has been very cheap in recent years and capital has moved into a growing litigation funding market. This has led several funders to be attracted to the insolvency litigation sector, typically funding expert reports, solicitor base costs and IP forensic analysis work. However, to have a reasonable prospect of attracting a funder the basic requirement is to have a circa 10:1 ratio between damages and the funding requirement, so this may have limited application to smaller claims.
SPG members may be interested to read more on this issue on pages 20-23, where you can find a useful summary of a round table discussion (involving funders, insurers, lawyers and accountants) on the pros and cons of the various options.
The most pronounced impact of the changes to the recoverability regime for CFAs and ATE premiums is likely to be seen in the short term, as most IPs will seek to push through litigation cases before the deadline. Thereafter, the extent of the gap left by the loss of the Jackson exemption will need to be determined on a case-by-case basis, with reference to the increasing number of finding alternatives. According to Clive Petty of JD; ‘the funding market is extremely innovative whereby the greater freedom and willingness for IPs to ‘sell smaller claims will spawn new players in this area and this will have the effect of pushing up prices paid to the benefit of creditors’. SPG members and their legal teams will therefore need to have access to good advice about the increasing range of tools available in litigation, in order to take advantage of this evolving landscape.