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Liquidators, Trustees in Bankruptcy and Administrators BEWARE: ATE Premiums & CFA Success Fees will Soon be Non-Recoverable in Insolvency Proceedings

View profile for Jonathan Haydn-Williams
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This note is relevant to liquidators, trustees in bankruptcy and administrators (“office holders”) who have, or may have, claims which, prior to April 2015, they ought – or wish – to bring against any third party on behalf of the company or bankrupt individual to recover money or property for the benefit of creditors. A change in the law, expected on 1 April 2015, will make it more difficult to bring such claims. Office holders should therefore review any potential claims well in advance of that date, so as to be able to take relevant action before the change takes effect.

At present, office holders who wish to bring such claims may do so by entering into:

i. a “No Win, No Fee” arrangement (by means of a Conditional Fee Agreement or “CFA”) with their own solicitors; and

ii. an After the Event (“ATE”) Insurance Policy with an insurer, which provides cover against the risk of losing and having to pay the defendant’s costs (as well as cover against own expenses, such as barristers’ fees).

 If they lose the claim, they have no liability for their own solicitors’ fees – and liability for the winning defendant’s legal costs (and own expenses) is covered by the ATE policy. The policy is written so that the premium is only payable in the event of a win, so there is no liability for the premium if the claim is lost (that may seem counter intuitive, but that is how it works).

If they win the claim, they are liable for:

a. their own solicitors’ basic fees + expenses + a success fee of up to 100% of the basic fees, but all of those are, in large measure, recoverable from the losing defendant; and

b. the ATE premium (which can be substantial), but that is also recoverable from the losing defendant.

In 2013, the government removed the right to recover success fees and ATE premiums from the losing defendant in the event of a win, leaving those amounts to be paid out of any damages recovered (or another source). However, in insolvency proceedings (see below for definition), a two year “period of grace” was allowed before the removal of recoverability took effect. The government has recently confirmed that it will take effect as of April next year.

We are willing to carry out an initial review of any potential claim by office holders, without charge, to consider whether we can offer to conduct it on a “No Win, No Fee” basis and whether ATE insurance is likely to be obtainable for it. There are now 6 months left before the change takes effect. It is vital that arrangements are put into effect well before then. The experience of 2013 was that there was a last minute rush for ATE insurance and that those who acted sooner had a better chance of obtaining appropriate insurance.

Example

If an office holder has a claim of £500,000 and enters into a CFA (“No Win, No Fee”) and an ATE policy:

BEFORE 1 APRIL 2015: if the claim is won and own basic legal fees are £150,000, an 80% success fee would be £120,000. An ATE premium based on opponents’ costs of also, say, £150,000 might be in the region of £60,000. Together the success fee and the ATE premium would total £180,000, which in principle should be recoverable from the losing defendant. In addition, perhaps 75% of the office holder’s own basic legal fees would be recoverable, i.e. £112,500.

Net proceeds of the claim: £500,000 – (25% x £150,000) = £462,500.

ON OR AFTER 1 APRIL 2015: if the claim is won and own basic fees, success fee and ATE premium are the same as above, the success fee and ATE premium are not recoverable from the losing defendant.

Net proceeds of the claim: £500,000 – (25% x £150,000) – £180,000 = £282,500.

If the full £500,000 were not awarded in court, or a lower settlement were reached before the trial, the viability of the litigation would decrease in the “on or after 1 April 2015” scenario. E.g. if £250,000 were recovered in damages, the net recovery would be only £32,500.

I have not included expenses, such as barristers’ fees, in the above example, as they would continue to be recoverable.

NB: The relevant action is entry into a CFA and ATE policy before 1 April 2015. Recoverability will then continue even if proceedings are not commenced or completed until after that date.

“Insolvency Proceedings”

These are proceedings brought by a person acting in the capacity of:

  • a liquidator of a company in creditors’ voluntary liquidation or compulsory liquidation;
  • a trustee in bankruptcy; or
  • an administrator.

or brought by a company that is in:

  • creditors’ voluntary liquidation;
  • compulsory liquidation; or
  • administration.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact Jonathan Haydn-Williams on +44(0)207 421 7936 or at jhw@gdlaw.co.uk.