Insolvency experts have warned that civil litigation funding reforms could deter small businesses from trying to reclaim debts.

Provisions in the government’s forthcoming Justice Bill will prevent successful claimants from recouping their solicitors’ success fee from losing defendants, or recovering an after-the-event insurance premium.

Opponents argue that this will leave creditors struggling to recoup losses from debtor company directors.

The Law Society has claimed the reforms will let bad debtors ‘off the hook’, while HMRC, the biggest creditor in most situations, is in talks with the Ministry of Justice to negotiate an exemption for insolvency cases.

R3, the Association of Business Recovery Professionals, said it is hopeful of persuading the government to back down from a ‘one-size-fits-all’ policy.

‘When the director of a company acts improperly, stripping value out of a company prior to insolvency, creditors are often left with nothing.

'In these circumstances, it is important that creditors should be allowed to recover both their losses and the cost of recovering those losses from the director,’ said R3 president Frances Coulson.

‘In insolvency litigation, the recoverability of success fees and after-the-event insurance premiums is a real and tangible benefit to society and the business community.’

R3 analysed 23 case studies where insolvency practitioners undertook litigation against a director or third party using a conditional fee agreement and ATE.

It found that if the government’s proposals had been in place, there would have been a £3.6m reduction in the amount recouped by creditors.

Chief executive of the Law Society Desmond Hudson said: ‘In such a difficult economic climate, and at a time when we are trying to promote entrepreneurialism in the UK, we should be asking whether the government is really sending out the right sort of signals to small businesses, for which payment of legal fees just to get what they are owed could mean bankruptcy.’

The Ministry of Justice is currently considering the impact on creditors of abolishing CFAs.

It claims reform of ‘no win, no fee’ cases will save businesses millions of pounds in expensive and unnecessary litigation.