In his recent Mustill Lecture, Jackson LJ delivered a speech arguing forcefully against any further continuation of the “insolvency carve-out” under which insolvency practitioners (IPs), and the insolvent companies in which they hold office, may continue to recover CFA uplifts and ATE insurance premiums from unsuccessful defendants.
The temporary exemption was originally announced on 24 May 2012 for the stated purpose of allowing practitioners time to adjust to changes and make alternative arrangements for litigation funding. No end date was given at the time, but it was widely believed that it would last for two years after the Jackson reforms took effect. On 26 February 2015, much to general surprise, the Minister of State for Civil Justice and Legal Policy announced that the insolvency exception would continue for the time being to allow more time to prepare for the changes.
Reasons for ending the exemption
Jackson LJ was clearly not happy about this. It is easy to sympathise with his feeling that there was a certain amount of flannel being employed. Is the insolvency exception being delayed to allow more time for people to adjust to it? Probably not. The reason why R3 is lobbying so hard against it (along with the Bar Council and HMRC) is not because it will take IPs longer to get their minds round the reform than it has taken everyone else, it is because they think that CFAs are, in the context of insolvency, a jolly good idea.
Jackson LJ gave four reasons for believing that the carve-out should end:
- CFAs were not brought in to benefit IPs in the first place; they were brought in to provide a replacement for legal aid.
- The recoverability of success fees and ATE premiums is oppressive.
- Recoverability drives up the overall cost of litigation.
- It is perfectly possible to bring insolvency litigation without the other side having to pay CFA uplifts and ATE premiums.
Benefitting from unintended consequences
The first point is true, although it’s not entirely clear why this really should matter: if it is a good thing that CFAs can be used in insolvency cases, then it will remain so even if this was an accident and not part of the government’s original intentions. Governments seem to get it right pretty rarely, so we might as well have the benefit of their unintended consequences if they turn out to be beneficial. The real significance of this point is that what really seemed to annoy Jackson LJ about CFAs was the fact that lots of parties who were not eligible for legal aid in the first place got to use them:
“For example, household insurers started using CFAs and ATE when they were suing local authorities in tree root cases. Wealthy companies litigating against SMEs sometimes used CFAs and ATE. Sometimes even businesses litigating against consumers used these devices. International finance companies suing the Civil Aviation Authority used CFAs and ATE. So did large contractors suing public authorities in procurement disputes.”
In these cases, the objection seems to be that the claimants did not really need to use CFAs, but chose to (perhaps, Jackson LJ hints, because they are so oppressive.) But does that apply to insolvency cases? Most insolvency lawyers I know prefer, on the whole, to be paid in the ordinary way.
And was it as undesired a consequence that liquidators could use CFAs as it was that insurance companies could? In a wider sense, the intention of CFAs was to allow impecunious litigants to be able to bring cases where funding was not otherwise available: the immediately intended beneficiaries were individuals, but it is hardly scandalous that this should turn out to work to the advantage of insolvent estates with no money in them.
This unintended consequence is unacceptable according to Jackson LJ because the uplift is payable to compensate CFA lawyers for the cases they lose. “Therefore [concludes Jackson LJ] at the end of the day [defendants] end up paying the total amount of both sides in all 100 cases, regardless of whether they won or lost any individual case.” This is a puzzling statement, since it is the defendants who lose who have to pay the costs, not the ones who win. The only way I have managed to make sense of this sentence is if we assume that the defendants are insured, in which case the insurance industry as a whole will pay. It is difficult to see how this applies to insolvency cases.
But while we are on the subject of unintended consequences, it would be well to note that, when the original Jackson consultation took place, no one thought about the impact of the proposed reforms on insolvency. The original Chancery Bar Association response made no mention of insolvency and broadly invited the end of CFA recoverability. No submissions were made by the ILA or R3 at that stage. It was only much later in the day when the writing was pretty much on the wall that a further set of submissions was put in about the unfortunate consequences for CFA cases. R3’s lobbying appears to have found more favour with politicians than it did with Jackson LJ.
Was the exemption given proper consideration?
Whether you think the insolvency carve-out is a good idea may then turn on whether you think it was ever given a proper consideration when the reforms were first considered, or at any time before the momentum behind the reforms became unstoppable.
As part of its evidence submitted to the government in support of the carve-out, R3 submitted a report form Professor Walton. The report argued that 24% of recoveries from FCAs in insolvency went to the government via HMRC. It pointed out that in insolvency cases, the people being sued were often alleged to be the parties responsible for the fact that there was no money in the case. This point goes to the heart of the theoretical case for not allowing CFA recoverability mentioned in the Jackson report: that a defendant should not be penalised for the method which the claimant chooses to use for funding his case. A defendant should not pay an extra 10% on top of legal costs because the claimant has borrowed the money at 10% interest to pay his lawyers, so why should the defendant have to pay more because the claimant uses a CFA? Well, say R3, because he nicked all the claimant’s money.
Intriguingly, this issue is not covered in the Mustill lecture, although Jackson LJ does mention the Walton report extensively. He rightly points out that Walton himself mentioned the recoverability of CFAs and ATEs as a factor leading defendants to want to settle. Jackson LJ regards this as game, set and match in his favour, because he regards the imposition of that risk as oppressive and flawed in the CFA scheme as a whole.
Rough justice
But none of this really goes to the heart of the question: does the fact that defendants in insolvency cases are often responsible (and perhaps slightly more often alleged to be responsible) for the fact that the insolvent estate has no money, justify treating them a bit more roughly than other litigants in order to do justice on the whole?
And does it make it better or worse that this slightly rough justice is being meted out in order to recover money for the government? It is a matter of opinion whether this justifies the more favourable treatment of insolvency CFAs, or whether it makes it even more objectionable. Still, it may well explain why R3 are getting a hearing.
So as you may gather, I can’t help feeling a bit sorry for Jackson LJ, who seems to feel that his fine arguments are being ignored by an industry on a mission using political clout to steamroller over objections. Well, a bit.
Disclaimer: I admit that I regularly act for IPs on CFAs against directors, and for directors against IPs on CFAs, although never in the same case.
