Jackson reforms and insolvency proceedings

Taken from Corporate Rescue & Insolvency Journal :

Corporate Rescue and Insolvency
(2013) 3 CRI 117
1 June 2013
KEY POINTS

●     From 1 April 2013 amendments were applied to the CPR which affects all court proceedings.

●     The overriding objective has been amended to ensure that cases are dealt with “justly and at a proportionate cost”.

●     Insolvency proceedings are exempted from the abolition of success fees and the ability to recover insurance premiums until April 2015.

The Background

On 1 April 2013 significant amendments to the Civil Procedure Rules 1998 were implemented, following a radical review by Jackson LJ.

The main change is that the overriding objective has been amended to ensure that cases are dealt with justly and at a proportionate cost. Other amendments which flow from this include tailored disclosure requirements, limiting information contained in factual evidence, increasing costs for defendants who do not accept a reasonable Pt 36 offer, and the use of concurrent expert evidence. The ability to recover a success fee and after the event insurance (ATE) will generally be removed under the reforms. However, damages based agreements, which previously were only permitted in limited matters, are now allowed in all civil proceedings, including insolvency.

The good news:

Insolvency proceedings are exempted from the abolition of success fees and the ability to recover insurance premiums until April 2015.

The not so good news:

Insolvency proceedings will be subject to the majority of the changes, in particular relating to the proportionality of costs in proceedings. Unfortunately when one drills down to look at how this will apply in practice, it is clear that amendments suitable for general civil cases do not necessarily fit into insolvency proceedings.

CASE AND COSTS MANAGEMENT

CPR Pt 3 is amended by adding Section II (Costs management) and Section III (costs capping) to all multi track cases. To bring proportionality into the issue of costs, Jackson has provided a structure which parties need to adhere to, consisting of four essential elements:

●     Parties must prepare and exchange litigation budgets, to be updated as the case progresses.

●     The court will consider the budgets at each stage of the process and either approve these or suggest changes.

●     The court is to manage the case to ensure it proceeds within the approved budget so far as possible.

●     The costs recoverable by the winning party will be assessed in accordance with the approved budget.

Parties (other than litigants in person) will be required to file and exchange costs budgets in accordance with Precedent H. A “budget” is defined as “an estimate of the reasonable proportionate costs (including disbursements) which a party intends to incur in the proceedings”.

Proportionality is to be assessed by reference both to the sum at stake and the complexity of the case.

CPR 44.3(2) has been amended to provide that costs which are disproportionate are to be disallowed or reduced even if they were reasonably and necessarily incurred. Not surprisingly, this is one of the more controversial reforms for practitioners.

Unfortunately, Precedent H does not easily fit the average insolvency application, which is rarely as formal as other civil proceedings, but practitioners will have to adapt their costs budgets to Precedent H as best they can. Only the summary page need be completed where the budget does not exceed £25,000. This will probably encompass the majority of insolvency proceedings.

Parties are encouraged to agree each other's budgets. The court will consider the budgets and revise them as appropriate before approval at a case management conference (CMC) or at a costs management conference fixed specifically for that purpose, although a costs judge carrying out a detailed assessment will not be bound by this.

Some uncertainty remains for insolvency cases however, as many applications are not formally contested, and even where they are contested they will rarely trigger the regime under the new CPR 26.3 (below) which in turn triggers the case and costs management structure.

MULTI-TRACK

Under CPR 26.3 directions questionnaires (DQ) will now replace allocation questionnaires. In standard litigation if, on the filing of a defence the court allocates the case to the multi-track, it will specify a date by which a DQ and a costs budget must be filed and exchanged.

However, defences are not served as a matter of course in most insolvency proceedings, so there will rarely be a DQ sent out by the court.

In the absence of a date for filing and exchanging a budget with the new DQ, the obligation arises seven days before the first CMC instead, but again in insolvency proceedings there is not always a CMC. In particular, where the parties agree directions there is no need for any further directions hearing. A second directions hearing will presumably be treated as a CMC for these purposes, but as this may not take place at all, many insolvency disputes won't trigger these costs management provisions of CPR 3.

It remains to be seen how far the judiciary wish to bring insolvency proceedings under the new rules. If they make a point of ordering CMCs to bring the costs management provisions into play, parties will have to prepare budgets, but if parties can demonstrate to insolvency judges that they are alive to the need to keep costs under control, it could be that insolvency proceedings may not be as affected by the changes. In practice, ordering a CMC simply to ensure that the new costs management regime is engaged will actually serve to increase costs, and defeat the very purpose of the regime.

SANCTION

The sanction for not filing a budget is severe; the party will be treated as having filed a budget comprising only the court fees.

DISCLOSURE

Disclosure is seen as a driver up of costs. New CPR 31.5 introduces a system whereby the parties have first to file a report explaining in general terms what documents they have and where they are. After exchange of these reports the parties are required to discuss and “seek to agree a proposal ….that meets the overriding objective”. At the next CMC, the court has to decide what order should be made regarding disclosure, including an order limiting or dispensing with disclosure altogether.

COST CAPPING

A costs capping order will limit the costs the successful party may recover to that specified in the capping order. A costs-capped party may apply to vary the order, but only if there has been a “material and substantial change of circumstances since the date when the order was made” or there is some other compelling reason why a variation should be made (CPR 3.19(7)).

THE COURT'S ROLE

The rule relating to relief from sanctions (CPR 3.9) has been amended so that on any application for relief for failure to comply, the court will consider all the circumstances, including the need to enforce compliance with rules, practice directions and orders (CPR Rule 1.1(2)(f)).

Early indications are that the courts are encouraged to take a very firm line in controlling costs.

FIRST POST-JACKSON COSTS CASE

The first case on costs budgeting was heard this year: Murray and another v Neil Dowlman Architecture Ltd [2013] EWHC 872 (TCC). While not an insolvency case, it provides a good idea of what to expect.

In this case, the claimant had had a costs budget approved by the court, but later realised they had made a mistake, excluding a success fee and ATE premium.

The court allowed a late revision of the costs budget, but made it clear that this was because the claimants had been involved in the costs management pilot scheme and so it was not appropriate to penalise them for a mistake made. However, Coulson J provided interesting guidance, stating that in his view it will be extremely difficult to persuade a court in future that mistakes in an approved costs budget could later be rectified.

It is clear from this that when budgeting, insolvency professionals must think very carefully about the figures and assumptions behind them. The court is unlikely to consider a later application for review favourably.

It remains to be seen in practice how the reforms will affect insolvency, but insolvency professionals must be prepared for the courts to take a much tougher line on case and costs management than before.

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