Claims against Insolvency Practitioners – Is there light at the end of the tunnel?

With business liquidations and administrations down in Q1 of 2013, what will be the likely effect on claims against insolvency practitioners?

The numbers

The Insolvency Service recently reported that:

• Company liquidations fell 5.3 per cent in Q1 in 2013 compared to Q4 in 2012, and 15.8 per cent year on year.
• Businesses going into administration fell by 28.5 per cent compared to Q1 in 2012.
• Individual insolvencies were also down by 12.9 per cent in Q1 in 2013 by reference to Q1 in 2012.

The Association of Business Recovery Professionals reports that growth remains hesitant with businesses still facing significant issues. Fewer businesses were in distress in April 2013 (40 per cent) as opposed to November 2012 (54 per cent). 32 per cent of businesses stated the biggest problem they face is the rising cost of fuel and utilities, with 26 per cent complaining of reduced consumer spend, meaning that businesses are being pressed in terms of both their input and output.

Our analysis

In recent years, insolvency practitioners and their insurers have experienced greater pressure following an increased number of professional negligence claims, with those involving pre-packaged administrations among the most prominent. Two main causes of the increase in claims are a greater number of administrations and liquidations following the general economic downturn since 2007, and an increased awareness that those who consider themselves to have been prejudiced by an insolvency practitioner’s actions might bring a claim against the practitioner. In addition, the fact that insurers are in the picture often encourages would-be claimants, who then consider practitioners to be an attractive target.

Logic suggests that, as the number of administrations and liquidations decreases, insolvency practitioners and their insurers are less exposed to situations which might bring about a claim. There should, therefore, be fewer such claims. If so, given the usual delay between the accrual of a cause of action and a claim being brought, it may still be some time before practitioners and their insurers feel the benefit of any decline. Further, our experience of claims against financial professionals suggests that logic does not always play its part, meaning there might only be a small, or even no reduction in the number of claims at all. Recent changes to funding of claims could play a part in discouraging potential claimants, who might consider that paying more of their solicitors’ fees out of any damages they recover reduces the benefit of bringing a claim.

There are also warning signs suggesting that any improvement in businesses’ trading conditions might be short-lived, with the potential for yet another downturn in this volatile economic climate adding to the general feeling of vulnerability. The effect of another dip, even if it falls short of genuine recession, could quickly reverse any optimism generated by the improved figures above.

Conclusions

While there are still clear obstacles preventing a more rapid recovery, the destructive effect on businesses of the current, difficult economic climate seems to be waning. Although the welcome result of this may well be fewer claims against insolvency practitioners, the benefit of that will undoubtedly take time to filter through to practitioners and their insurers alike. Fewer claims may also mean lower premiums, which practitioners would no doubt welcome, but which affect insurers’ profit margins.

There is a possibility that economic conditions may deteriorate again, leading to further increases in claims, and we will continue to analyse any trends that emerge and provide further updates in the future.