The Insolvency carve out – use and abuse
Guildhall Chambers, Bristol
1. The concept of lawyers' conditional fee agreements (‘CFAs') was first introduced in England & Wales by the Courts and Legal Services Act 1990, but it was not until the Access to Justice Act 1999, implemented on 1 April 2000, that CFAs were extended so as to include the ability to recover success fees and after the event (‘ATE') insurance premiums. Litigation funding meanwhile remains on a non-statutory footing, with case law rejecting the idea that this would constitute improper maintenance or champerty, as long as the funder was not the controller of the litigation. On 1 April 2013, following the implementation of amendments to the 1990 Act, as part of the Jackson reforms the CFA regime was altered, and damages based agreements (‘DBAs') were extended outside the employment context. In particular, the recoverability of success fees, in new style CFAs, and ATE premiums were removed, save for certain proceedings, including ‘insolvency' proceedings. This brief article asks, and seeks to answer, three questions relating to the so called ‘insolvency' carve out:
i) What is the ambit of the carve out?
ii) Does the carve out have a time limit?
iii) In what circumstances will use of it be characterised as an abuse?
Ambit of the carve out?
2. The insolvency carve out was effected by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No. 5 and Saving Provision) Order 2013. In particular Article 4 provides that the removal of recoverability of success fees and ATE premiums do not apply to:
(c) proceedings in England and Wales brought by a person acting in the capacity of-
(i) a liquidator of a company which is being wound-up in England and Wales or Scotland under Parts IV or V of the 1986 Act; or
(ii) a trustee of a bankrupt's estate under Part IX of the 1986 Act;
(d) proceedings brought by a person acting in the capacity of an administrator appointed pursuant to the provisions of Part II of the 1986 Act;
(e) proceedings in England and Wales brought by a company which is being wound-up in England and Wales or Scotland under Parts IV or V of the 1986 Act; or
(f) proceedings brought by a company which has entered administration under Part II of the 1986 Act.
3. Article 1 of the 2013 Order defines ‘proceedings' to have the same meaning as in s 58A(4) of the Courts and Legal Services Act 1990(3), which defines proceedings in wide terms, as including ‘any sort of proceedings for resolving disputes (and not just proceedings in a court) whether commenced or contemplated'.
4. It is clear therefore that the carve out is effective to preserve the ability of recovery of uplifts and ATE insurance premiums in any claim a trustee, a liquidator or administrator may wish to bring, whether or not the claim is brought in the name of the office holder (for example under s 212 of the Insolvency Act 1986 or paragraph 75 of Schedule B1), or in the name of the company (for example as a straightforward claim under part 7 of the civil procedure rules (‘CPR')). Moreover, it applies to enable a company to bring a claim and recover success fees and ATE premiums even where those would not have been recoverable before a company entered into liquidation.
5. In short the carve out is defined by reference to whether or not the claimant corporate vehicle is in liquidation, or in administration, rather than to consider the nature of the claim being brought by the company.
6. It ought, logically, to apply to any counterclaim brought by an officer holder or company in proceedings, as well as to any claim (especially having regard to the way in which counterclaim is defined in the glossary to the CPR).
7. Similarly if a respondent in the proceedings, or a defendant to a counterclaim brought by an office holder or company in liquidation or administration, enters into a CFA with its client and obtains ATE cover, there is nothing in the 2013 Order to suggest that they should not also be able to recover any uplift and ATE premium in the event of success.
8. Accordingly, whilst the origin of the carve out may be said to arise out of desire to ensure asset less shells are not stifled or inhibited from being able to bring meritorious claims against errant directors or third parties, its effect appears to be wider than that.
What does the Order not include?
9. An obvious example, in the insolvency context, would be costs incurred in litigating in relation to a statutory demand, or matters where the company has not yet gone into liquidation or administration. Battles as to whether or not an insolvency regime should be engaged falls outside the carve out.
10. Another obvious example is voluntary arrangements: neither CVAs nor IVAs benefit from the carve out.
11. A moot point is whether or not a foreign office holder for a company outside the jurisdiction, who gains recognition, would have the benefit of the carve out. On the basis of the wording of the Order it would seem that such an office holder would not, since the company in question is not one being wound up or administered under the Act, and the office holder is not one defined by the Act. That would appear to be so even where the foreign company has creditors in this jurisdiction, and it may be said this is not a fair or appropriate place to draw the line having regard to the cross border nature of modern commerce.
Does the carve out have a time limit?
12. The 2013 Order itself does not contain any time limit. So until further notice the carve out can be used.
13. Nevertheless, the Government announced that the insolvency carve out would remain in place until April 2015, the logic apparently being that by then the market would have settled down and be able to provide suitable commercial solutions to the insolvency sector. April 2015 is, of course, after the next general election.
14. The reality is that very little DBA activity is taking place in the general commercial market and the structure of DBAs is itself currently under review. It is not apparent having regard to litigation activity post Jackson, that the Jackson reforms do provide effective access to justice to ‘middle England' businesses and individuals. The logic of the insolvency carve out may be said to be that creditors should not be short changed where a company has been run into the ground, but following that reasoning through, why should a company brought almost to insolvency not be given the benefit of the carve out regime than one actually placed into insolvency?
15. R3 is currently undertaking a research project or survey, in conjunction with Dr Peter Walton of the University of Wolverhampton, into whether the carve out should be made permanent, and readers who are interested in that topic are recommended to contact R3. It is understood that a report is due to be issued by Dr Walton and R3 by the end of this year.
Use or abuse?
16. It is readily apparent that on the face of it the 2013 Order enables a company to enter into liquidation, or administration, bring proceedings, and thus get the benefit of the exemption. To take an extreme example, and having regard to the wording of Article 4(f), is there anything to stop a company filing for administration so as to enable a claim to be brought in its name to take advantage of the exemption, and then to exit administration even before the proceedings are concluded? Would this be viewed as a legitimate use, or an abuse by the Courts? Or indeed what about the situation of a company purchasing, by way of assignment, a cause of action, in order that it can obtain the benefit of the exemption? It is recognised that the circumstances in which this would arise are likely to be limited but it is worth considering what the court's approach might be.
17. This issue of subversive assignments was considered recently, indirectly, in the context of considering whether there has been a ‘material irregularity' at or in relation to an Individual Voluntary Arrangement (IVA) meeting within s 262(1)(b) of the Insolvency Act 1986 (‘IA') in Kapoor v National Westminster Bank Plc & Tan  EWCA Civ 1083. In that case there was an assignment where it was patently intended, and intended only, for the purpose of subverting the legislative policy of openness and good faith in IVAs. The Court of Appeal concluded that the good faith principle applied to the IVA and, by virtue of its application, there was a material irregularity within s 262(1)(b) IA at or in relation to the creditors' meeting which approved Mr Kapoor's IVA.
18. Outside the world of IVAs, however there are signs the court might look at the matter in a more relaxed way. In particular in Norglen Ltd v Reeds Rains Prudential Ltd  2 AC 1 Lord Hoffmann stated (at pp. 13G-14A):
‘If the question is whether a given transaction is such as to attract a statutory benefit, such as a grant or assistance like legal aid, or a statutory burden, such as income tax, I do not think that it promotes clarity of thought to use terms like stratagem or device. The question is simply whether upon its true construction, the statute applies to the transaction. Tax avoidance schemes are perhaps the best example. They either work ... or they do not ... If they do not work, the reason ... is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it. It is not that the statute has a penumbral spirit which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes. There is no need for such spooky jurisprudence.'
19. On the face of it, therefore, there seems no reason in principle why a company could not choose to enter into administration, or liquidation, for the sole or substantial purpose of obtaining the benefit of the exemption under the 2013 Order. Nor does there appear to be any prohibition, per se, in a company in administration obtaining, by way of assignment, a cause of action and issuing proceedings in its name. In the context of group companies it is not inconceivable that such a scenario might arise.
20. In summary, whilst each case would need to be considered separately, it does not seem likely that the court would consider it an abuse for a company to enter into administration or liquidation in order to use the benefit of the carve out under the 2013 Order.
21. Nothing in this article however, is intended to pass any comment on the size of the uplift or ATE premium which may sought to be recovered in any individual case. That of course would require a fact sensitive consideration of the issues involved.
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