Funding Legal Costs
Where Disqualification Proceedings are threatened against a director, that director faces the Secretary of State with an army of solicitors and endless resources employed against him/her.
Meanwhile the director, as with many SME directors, may have little resources to fund the necessary legal costs, which are not inexpensive.
Accordingly, it is no surprise that a majority of directors accept a Disqualification Undertaking rather than actively contesting the threatened Disqualification Proceedings – because they simply cannot afford it.
We are often asked about the options to fund legal proceedings with Legal Aid funding often raised.
Unfortunately, legal aid is not available for Director Disqualification proceedings generally and it is not an area currently supported by the Legal Aid system.
Directors and Officers Insurance
Directors and Officers Insurance, or D&O as it is often referred to, will often enable a director to defend a Disqualification Claim. The D&O insurance may be available from the cover obtained via the insolvent company or via the Director’s new/current company.
The terms of your D&O insurance should be reviewed – particularly any exemptions relating to fraud in office or otherwise, and any periods it lapsed or is due to expire (and of course the financial limits of such cover).
Conditional Fee Agreements
If your defence is strong enough, there remains the option for a director to instruct a Solicitor on a “no win no fee” basis – where the solicitor is only paid if the director successfully defends his case.
These are known as conditional Fee Agreements and provide that, in the event of a win (i.e. the director successfully defending his/her case) that the solicitor will be paid their base rates plus an “uplift” which can be no more than 100% (or double) the solicitor’s base rate fees.
Whilst a director’s legal costs can be recovered from the Secretary of State at trial (or earlier if proceedings are discontinued), the uplift part can no longer be claimed as a result of the legal changes to litigation funding (in 2013). Accordingly the director would have to bear the cost of the uplift.
Such arrangements are suitable for directors who have a lot resting on their defence and for whom the defence of a Disqualification Claim will provide a bonus far in excess the cost of the uplift under the Conditional Fee Agreement.
These agreements are not that common – a director would have to show an extremely strong defence for a solicitor to consider entering into such an agreement, although it does occur.
After The Event Insurance (“ATE”)
ATE insurance is an insurance popular with claimants where the risk of legal proceedings is insured against by buying an insurance policy which covers the costs risks of the claim.
In the event the claim is successful, the ATE insurer will demand a hefty insurance premium as the cost of providing such cover.
For Directors facing disqualification proceedings there is an upfront option for ATE which may in certain circumstances prove attractive.
Provided the director can support (with legal opinion) that the prospects of successfully defending a Disqualification Claim are high, an insurer may offer a staged insurance policy to protect against the director’s legal costs of defending the proceedings.
This does not mean they will not have to fund their legal costs (which they will) but, for a premium (payable up front in stages – normally rising to 30-35% by trial of the total costs covered), if they are unsuccessful then such legal costs (and the Secretary of State’s legal costs) may be paid out of the insurance.
However, if the director was successful in defending the Disqualification Claim then such insurance costs would not be recoverable from the Secretary of State as part of the costs incurred in the proceedings.
This policy would enable directors to defend a Disqualification Claim with a more limited exposure to a fraction of the total potential liability.
At Francis Wilks & Jones we have considerable experience of Director Disqualification proceedings and advising directors on the above considerations and the risks of litigated disqualification proceedings, including advising on litigation funding models.
Please call any member of our Director Services Team for your consultation now on 0207 841 0390. Alternatively email us with your query at firstname.lastname@example.org and we will call you back at a time convenient for you.