Encompass Corporation LASPO Survey on Insolvency
The biggest risk area is around contracts, particularly in the SME sector, where businesses may not have the resources to pursue a costly claim.
The warning comes after a change to LASPO that came into force in April which now means that businesses are unable to insure their costs in the event of collapse to get back money owed.
In Encompass Corporation’s latest LASPO survey for the UK insolvency industry, 94% of legal and insolvency professionals said that businesses should be more careful when entering into contracts.
The majority of the professionals surveyed believed that one in three cases, where companies enter insolvency while holding undeclared assets, will not proceed to legal action. This is due to the lack of funding available to fund complex investigations and prosecution.
One in three said that over 40% of claims would not proceed due to the lack of funding.
Over 60% surveyed believed that it would be micro and small businesses employing up to 20 people that would be the most affected as they will not have the financial resources to pursue a company without insured protection, which means they need to take more care when entering contracts.
The changes are likely to reduce the number of cases where the officeholder would be able to pursue a claim.
More than 75% thought this would lead to an increase in illegal behaviour by directors because they believe that the risk of action against them has been reduced.
Wayne Johnson, founder and CEO at Encompass, said: ‘This change in the law may make pursuit of a claim too costly for creditors owed money by a company with assets of value but made insolvent by its directors.
‘Our advice is to employ a lawyer or other professional before entering into new contracts and request that they thoroughly check the counterparty and establish whether any director has a history of involvement with repeatedly failing companies.’