Vol 9 (2012) - Issue 1

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Changing the Face of Insolvency Litigation Funding: The Abolition of the General Recoverability of CFA Success Fees and ATE Premiums

1. Summary

As the recession deepens and the level of litigation rises, funding continues to be an area of intense debate. In his Final Report, Lord Justice Jackson identified success fees under conditional fee arrangements ('CFA') and after-the–event insurance ('ATE') premiums to be major drivers in the excessive and disproportionate costs of civil litigation in England and Wales. The Legal Aid, Sentencing and Punishment of Offenders Bill, presented to Parliament during June 2011, contains the enabling provisions for implementation of Lord Justice Jackson’s recommendation that such success fees and premiums cease to be recoverable from unsuccessful opponents in civil litigation. Increasing utilisation of CFA and ATE to fund insolvency litigation has caused concern that it will become increasingly difficult to pursue, among others, fraudulent directors of insolvent companies and will restrict the recovery of funds for creditors in even the most flagrant of cases. The reforms proposed by Lord Justice Jackson, coupled with the forthcoming implementation of alternative business structures makes it difficult to predict how the area of litigation funding will develop. Reform is inevitable and firms, should be adapting their business models to ensure continued profitability under the proposed new regimes.


2. CFA, ATE and the perceived problems

2.1. CFA

A CFA is an agreement pursuant to which solicitors agree with their clients not to be paid if the case is unsuccessful but to be paid an uplift on their base costs, known as a success fee, in the event that the client’s claim succeeds. The success fee is not calculated as a proportion of the amount recovered by the client but is instead a percentage (up to 100%) of the base costs. Theoretically, the success fee compensates those acting on a CFA funded basis for the CFA funded cases they lose, thereby subsidising solicitors for the cases that fail. 2.2. ATE In practice a CFA funded party will usually also take out ATE. The principal function of ATE is to provide the insured with sufficient funds to meet the opponent’s costs in the event that the insured is ordered to pay those costs. It is the best way to ensure that, without making any financial demands on the insured, an adverse costs order is met and the insured’s own disbursements are paid.

The premiums for such policies can be, and often are, extremely high. The insurance premium is often insured such that the insured party does not have to pay if the claim fails and if the claim succeeds the premium is payable by the losing party.


2.3. The perceived problems

The recoverability of success fees under CFA and ATE premiums was introduced by the Access to Justice Act 1999 to coincide with, and partly to facilitate, the substantial retraction of legal aid. At that time, the intention was to ensure that damages awarded to successful parties were in no way eroded by uplifts or premiums and that the party in the wrong bore the full burden of the costs. It was recognised that seeking recourse under the civil law tended to be accessible only to those who were either affluent enough to fund it themselves or poor enough to qualify for legal aid. Recoverability provided support for those who did not qualify for legal aid but who could not afford to litigate without putting their personal assets at risk.

Although the availability of CFA and ATE to litigants has undoubtedly improved the facilitation of access to justice, particularly given the general recoverability of the success fees and the premiums, their use has been distorted and is continuously open to abuse. Any person who can locate a willing solicitor and/or insurer can take advantage of the current regime regardless of whether or not that party required financial assistance to fund the claim and the protection afforded is total, even if a party is able to make a contribution to their costs, they are not required to do so.