'Unscrupulous and illegal' behaviour to rise following removal of litigation funds

Lawyers and insolvency professionals believe changes to insolvency litigation will lead to 'unscrupulous or illegal behaviour' by directors who no longer fear the risk of legal action being taken against them.

A survey by Encompass Corporation found that four-fifths of respondents think that one in three cases where companies place themselves into insolvency while holding undeclared assets will not proceed to legal action due to a lack of funding available for investigation and prosecution.

The survey follows a change to the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), which until April this year allowed businesses to insure their costs in the event of a failure to recoup monies owed to them.

The findings are consistent with data reported by R3 in April 2016, which found that insolvency litigation backed by conditional fee arrangements realised approximately £500m per year for insolvent estates, with around £120m of this owed to HMRC.

Almost one-third of those surveyed thought that the cessation of the LASPO exemption would affect over 40 per cent of cases where action would previously have been taken.

Lawyers also warned that SMEs would be most adversely affected by the change as they would not have the financial resources to pursue a company without insured protection.

Some 94 per cent of those surveyed recommended that businesses be more careful when entering into contracts.

Wayne Johnson, Encompass CEO, said: 'This change in the law may make pursuit of a claim too costly for creditors owed money by a company with assets of value but made insolvent by its directors.

'Our advice is to employ a lawyer or other professional before entering into new contracts and request that they thoroughly check the counterparty and establish whether any director has a history of involvement with repeatedly failing companies.'