Changes to the way in which fees can be charged will soon make it more difficult for creditors to sue fraudulent directors.
Insolvency professionals currently regularly use no win no fee arrangements (where, if the solicitor does not win the case, the client does not have to pay them any professional fees) to recover funds in cases of suspected wrongdoing or fraud by company directors where their company has become insolvent.
Research from the University of Wolverhampton shows that in 2014, this type of funding allowed the insolvency profession to pursue over £1bn owed to creditors and successfully retrieve around £480m, including £115m on behalf of HMRC.
No win no fee arrangements have been outlawed for many types of litigation for several years. When the new rules were introduced in 2013, however, a temporary exemption was allowed for insolvency cases as a result of industry lobbying. This exemption was due to expire in early 2015, although it was retained to enable further consultation.
The decision has now been taken to end the exemption.
Conditional fee arrangements are frequently the only way to pay for legal action as there are often no funds left in an insolvency; with the costs payable by the defendant if they lose.
Ironically, the burden of costs will now fall on the creditors who have been wronged in the first place, since those costs will be borne by the funds in the insolvency practitioner’s custody which would otherwise have been used to pay creditors.
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