On Thursday 26th February, the Ministry of Justice announced that the insolvency exemption to sections 44 and 46 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (‘LASPO’) will continue for the time being, having been scheduled to come to an end in April 2015.
The insolvency exemption allows office holders in insolvency procedures to continue to recover from a losing party:
(i) success fees under conditional fee arrangements (‘CFAs’); and
(ii) premiums paid under after the event (‘ATE’) legal expenses insurance policies.
Following a campaign by the insolvency industry, the Government has agreed that more time is needed to allow preparation for and adaptation to removal of these recoverable costs. The Government is considering the appropriate way forward and will set out further details later in the year.
Practitioners will welcome this development and will continue to push for a permanent exemption, as the use of CFAs and ATE policies enable claims for the benefit of creditors to remain commercially viable. The insolvency trade body R3 estimates that the exemption protects £160 million of creditors’ money annually that otherwise could have been kept by fraudulent or negligent directors or third parties.
The industry will also await the Supreme Court’s final decision in the adjourned Coventry and others (Respondents) v Lawrence and another (Appellants) (No 2)  UKSC 46, in which the practice of recovering success fees and ATE premiums has been challenged as a potential infringement of the right to a fair trial under Article 6 of the European Convention on Human Rights. If this challenge is successful, it might threaten the continuing exemption, though it is unlikely to directly affect existing claims.
We continue to work closely with insolvency practitioners, and as one of the biggest global law firms with litigation as one of its core practices, we understand alternative fee arrangements and have a menu of alternative and risk-sharing fee structures, including CFAs, which we offer to clients in suitable cases. Please get in touch with Ben Summerfield, Emma Flacks or your regular Reed Smith contact.
Client Alert 2015-053