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Exemption of Insolvency Cases under the No Win No Fee Reforms Engendering Debates

June 14, 2012 by  Filed under News


Recently, the government has declared that the insolvency cases will be exempted from no win no fee reforms till April 2015, since the insolvency practitioners take long time to adapt to the civil justice reforms mentioned in the Legal Aid, Sentencing and Punishment of Offenders Act. According to Jonathan Djanogly, the justice Minister of the UK government, the HM Revenue and Customs are mostly the major creditors in insolvency cases and, thus, the inclusion of insolvency in no win no fee reforms would cost the government a no win no fee solicitorshuge income tax. The statute eliminates the recoverability of success fees and after-incident insurance premiums from losing parties, with effect from April 2013. Here, it is important to notify that the UK government has already taken a U-turn on the industrial disease claim, letting them off from the no-win-no-fee reforms till an impact assessment is conducted.

Corporate insolvency cases are common in the UK. Statistics for total corporate insolvencies have been recently published on May 2012 to show how common corporate insolvencies are in the UK. According the statistical figures, there were about 4,260 creditors’ voluntary liquidations and compulsory liquidations in Wales and England in the last part of 2011. Again, there were 1,173 other forms of corporate insolvencies during this period.

While declaring the exemption of insolvency cases from the no win no fee reforms, Djanogly submitted a written statement in the House of Commons stating that the insolvency cases bring good revenues to the taxpaying population and to the creditors and, in the process, promote excellent business practices that can be viewed as an important aspect of the growth agenda offering substantial benefits to the economy.

The environment where corporate insolvencies are resolved has undergone a change of late. In the last 15 years, the Enterprise Act of the UK has acted as the prime means to remodel and reform the corporate insolvency law of the nation. The reformation of the corporate insolvency law has made corporate rescue a hot topic for debate within the professional and legislative arena.

Generally speaking, insolvency is the name given to the situation where corporate houses and business enterprises do not have the monetary resources to pay their creditors and employees. Basically, there are two preconditions meeting which a company can be classed as insolvent. These are cash flow insolvency and balance sheet insolvency. No matter in which category you belong, it might be a civil and, in some instances, a criminal offence, if your company director’s allow your firm to continue its business during insolvency.

The employees of an insolvent company are entitled to demand specific payments from the National Insurance Fund. In specific instances, it might be difficult to claim the total amount of money they owe. Previously, the employees of the insolvent companies had the opportunities to seek expert opinions of the no win no fee solicitors, but from now, after the declaration made by Djanogly, the affected employees would not feel the urge to get the services of the no win no fee solicitors for acquiring their insolvency payment claims. The insolvency practitioner normally offers the important forms to the claimants for demanding money they owe. If this does not happen, the claimant can write to the insolvency practitioner who will clarify all ways to claim and receive payments from the Redundancy Payments Office and HM Revenue & Customs (HMRC). There is no such guarantee that the employee will receive all the claims in full. When an employer is insolvent and makes his workers redundant, the workers can demand Statutory Redundancy Pay. In order to be eligible for the payment, the worker need to present documents evidencing that he has been continuously working under the employer for 2 or more years. He should also offer a written application to the employer within the 6 months of his job ending.

The recent declaration regarding the exemption of insolvency cases from no win no fee reforms has created a great chaos among the UK insolvent companies and no win no fee solicitors specializing in insolvency cases. The campaigners have placed genuine arguments favoring the exemption throughout the debates in the House of Commons. While the members of the opposition party have laid down an amendment favoring the exemption, Lord Justice Jackson has suggested the abrogation of the recoverability for insolvency cases in his civil justice report. The justice minister has confirmed that he has approached the Civil Justice Council and asked suggestions for enforcing qualified one-way costs shifting by the end of June 2012. The government has promised to declare the details about the changes before the summer recess and intends to effect the changes by April 2013.

While speaking about the government’s declaration about the exemption of the insolvency cases, the chief executive of the Law Society, Desmond Hudson, stated, “Following the case made by the Law Society and others, the government has accepted that more time is needed to evaluate the effect of the new civil proceedings arrangements on insolvency cases and to allow the legal sector time to adjust. We would like to see this logic applied to other types of cases, where a similar implementation delay, until 2015, would help to avoid unwelcome impacts on ordinary people’s right to secure legal redress”.

Now, the question is: How will the changes made to the no win no fee legislation affect the creditors in insolvency? The HM Revenue and Customs, who are the greatest losers in insolvency cases, have presented a response to the consultation process. Moreover, R3, the Association of Business Recovery Professionals, have ventured out to start a campaign for exempting the insolvency cases from the proposed no win no fee reforms. According to a spokesperson of R3, the new regulations can lower the returns to the creditors by 50 %. A representative of the UK Ministry of Justice stated, “We are considering the impact of abolishing conditional fee arrangements recoverability in insolvency and related proceedings. These proceedings can bring substantial returns to creditors, including HMRC”.

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