SMEs warned to tighten contracts to avoid losses in insolvency disputes

Changes to the rules under the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) could have unintended consequences for businesses owed money by companies entering administration, a new report has warned.

The changes, which came into force in April, mean businesses are now unable to insure their costs when it comes to getting back their money owed. Greater protection is being provided for directors of dissolved businesses but it is claimed that the measures could have an unintended impact on creditors.

In a recent LASPO survey for the UK insolvency industry, the vast majority (94%) of insolvency practitioners said that they believed businesses and individuals needed to take more care when drafting and entering into contracts.

Lawyers and insolvency professionals warned that many claims for less than £100,000 against companies entering administration were unlikely to go ahead.

The majority of those surveyed believed that around one in three cases involving companies entering insolvency while holding undeclared assets will not now proceed to legal action. This is due to the lack of funding available for complex investigations and prosecution. One in three respondents estimated that more than 40% of claims where action would previously have been taken would not now proceed due to funding issues.

SMEs could be particularly vulnerable as they are more likely to lack the resources to fund actions themselves. More than 60% of the insolvency professionals surveyed felt that micro-businesses and small businesses employing 20 or fewer people would be most affected by the lack of insured protection.

Smaller businesses should be particularly careful when entering into contracts but businesses of all sizes and types are warned to be diligent.

The survey also revealed that more than three quarters of insolvency practitioners and lawyers thought that the expected reduction in pursued claims could lead to an increase in unscrupulous or illegal behaviour by directors, who may believe that the risk of legal action against them has now been significantly reduced.

By Phil Smith

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