Plans to restrict use of conditional fee agreements in insolvency cases dropped 'for the time being'

Trade body R3 and other industry groups had lobbied for insolvency cases to be permanently excluded from the application of part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO), which came into force generally on 1 April 2013, but was delayed in respect of insolvency proceedings until April 2015. They had argued that extending the general prohibition on recovery of CFA success fee uplifts and after the event (ATE) legal insurance premiums to these cases would make it uneconomical to pursue negligent or fraudulent directors.

Insolvency law expert Nick Pike of Pinsent Masons, the law firm behind Out-Law.com, said that it was good to see "sense prevail - albeit at a late stage". The government has said that it will "consider the appropriate way forward for insolvency proceedings" and publish further details later in the year.

"While there is no further date set for the completion of the review, given that the extension is open-ended it seems unlikely that the government - of whatever colour - would decide to terminate it any time soon," Pike said.

"Insolvency cases are very different from insurance-based personal injury litigation - feasibly, the only way in which a lawyer can justify taking on the risk and expense of these cases is under a CFA, enabling them to recover most of their costs from the unsuccessful defendant without significantly reducing the assets available to be distributed to the creditors. Getting rid of the recoverability of the CFA uplift in these cases removes a significant incentive to litigate on behalf of creditors," he said.

In his 2010 review of civil litigation funding, Lord Justice Jackson recommended that CFA success fee uplifts and ATE premiums should not longer be recoverable from the losing party in civil litigation cases. The aim of these proposals was to crack down on the rising cost of civil litigation and to better protect public funds and the public interest. When introduced, the rules included a temporary exemption for insolvency litigation.

In a written statement to parliament, justice minister Lord Faulks said that the purpose of the delay was "to give insolvency practitioners and other interested parties time to prepare for and adapt to the changes". "However, the government now agrees that more time is needed," he said.

"The government will therefore delay commencing sections 44 and 46 of the LASPO Act 2012 for insolvency proceedings for the time being. Accordingly, no win no fee agreements in insolvency proceedings will continue for the time being to operate on a pre-LASPO Act basis with any conditional fee agreement success fees and after the event insurance premiums remaining recoverable from the losing party," the statement said.

Insolvency trade body R3 said that the decision would protect around £160 million worth of creditors' money a year that could otherwise have been kept by fraudulent or negligent directors or third parties, as only the largest creditors would have been able to afford to pursue litigation.

"Insolvency litigation brings back millions of pounds every year to small businesses and taxpayers owed money by negligent or fraudulent directors," said R3 president Giles Frampton. "This money would have been put at risk if insolvency practitioners lost their ability to use 'no win, no fee' funding from April."

"The decision is a big boost for the fight against business fraud and malpractice, and will help keep smaller creditors on a level playing field with those determined to withhold money from them," he said.