The following notes may be of help to anyone who is in financial difficulty or who is Bankrupt to understand some of the implications of insolvency.
An Individual Voluntary Arrangement (IVA) is in many cases preferable to Bankruptcy as it is beneficial both to creditors because of the lower costs, and to a debtor because it avoids the permanent black mark of Bankruptcy.
What is an IVA?
An IVA is in effect a contract between a debtor and his creditors and is therefore a more private matter than Bankruptcy which is very often the only other alternative. The assets are held by a Supervisor, who must be an Licensed Insolvency Practitioner, in trust for the creditors. There are no public notices although a Register of current IVAs is maintained by the Insolvency Service which is open for inspection by the public.
An IVA is entered into simply by calling a Creditors’ Meeting and proposing to them that you will provide whatever assets or income you are able to, so that they will be in a better position financially than if you go Bankrupt. If more than 75% in value of those creditors expressing an opinion accept your proposals then it is legally binding on all creditors who were given notice of the Meeting. Creditors who are associated with you (e.g. family members) have slightly different voting rights. With effect from 12th January 2010 you cannot include a Student Loan in an IVA.
How does it Work?
Needless to say, in detail, the matter is somewhat more complicated. A Statement of Affairs needs to be drawn up, as do detailed proposals which must not only make good commercial sense, but must also comply with the law. An IVA must be done through a Licensed Insolvency Practitioner who will usually be closely involved in the preparation of the proposals and the Statement of Affairs.
The next stage is for the Insolvency Practitioner, who is called the Nominee at this point in the proceedings, to prepare a report to creditors on the the proposals and Statement of Affairs saying that he believes the proposals are beneficial to the creditors and capable of implementation. He will then send to all known creditors full details of the report, proposals and Statement of Affairs and ask them to agree, usually by calling a virtual Creditors’ Meeting.
If you have creditors who are pressing very hard and a landlord or High Court Enforcement Officer (bailiff) is about to seize goods or perhaps a Bankruptcy Order is about to be made against you, it is possible to hold off proceedings by obtaining an Interim Order from the Court to give you time to hold the Creditors’ Meeting to get the IVA approved. To obtain an Interim Order, an application is made when the documents are filed in Court. The Interim Order has the effect of freezing all legal proceedings against you for a period of a few weeks, in order that a Creditors’ Meeting can be called during that time. The Court will usually grant the Order without much difficulty if good cause is shown.
Who can do an IVA?
In order to be eligible to propose an IVA you must be insolvent or an undischarged Bankrupt. Although this sounds fairly obvious it can catch people out because if you were made Bankrupt only a year ago you may have been discharged. You would not then be able to remove the Bankruptcy by replacing it with an IVA even if you have now got yourself back on your feet and want to make contributions to your creditors. You would only be able to get rid of the Bankruptcy by paying off all the debts in full with interest and costs, which could be very expensive. So, if you are already Bankrupt think hard about the possibility of an IVA before you get your discharge when it will be too late. In addition you cannot apply for an Interim Order if you have made a previous application in the last twelve months.
At the Creditors’ Meeting the creditors may propose modifications to the proposals such as extending the period of time or increasing the amount to be paid, and then vote on whether or not they wish to accept. You do not have to agree to their proposed changes but, if you do not, they may vote against the IVA. The Nominee, who is Chairman of the Meeting, will prepare a report of the result of the meeting. Assuming it has been accepted, the IVA takes immediate effect and it is overseen by the Insolvency Practitioner who is now called the Supervisor. If it has not been agreed by the creditors then you will be back in the same position as if you had not made the proposals.
If the IVA has been accepted then provided that you comply with its conditions (i.e. do everything that you promised to do) then the creditors must accept whatever dividend they receive from the Supervisor in full and final settlement of their debt and can take no further action against you. If anyone wishes to challenge the IVA or any aspect of its implementation then there is a procedure for them to apply to the Court for a ruling.
If there was a Bankruptcy Order against you it will be annulled. i.e. removed from the record so that legally it never happened.
If you do not comply then the Supervisor will report the failure of the Arrangement to the creditors. Not only will the creditors thereafter be able to Bankrupt you but so too will the Supervisor which he may well do if requested by the creditors.
An IVA does not affect the rights of secured creditors and is not binding on them, except in so far as there may be a shortfall due to them and it will be necessary to continue to make mortgage payments or at least to come to some agreement with the mortgagees. Landlords in respect of leases are to a degree treated as secured creditors in an IVA and if you have a lease it will be necessary to give careful attention to the way in which the future rent is to be treated or paid.
A Supervisor of an IVA does not have the same powers of investigation and prosecution as a Trustee in Bankruptcy or the Official Receiver. Creditors must be satisfied therefore that there has been a full disclosure and that there is likely to be full co-operation before they will contemplate agreeing to one. It is important therefore that you should not propose an IVA unless you fully intend to co-operate and comply with it otherwise all it will do at best is to delay the onset of Bankruptcy. A full disclosure of your financial position to the Nominee is therefore essential. If any creditor is inadvertently omitted he will nevertheless be included and entitled to the same dividend as if he were a party to the IVA from the start. Care should however be taken because if creditors can convince the Supervisor or the Court that the IVA was originally approved because of misrepresentation then not only will it fail but an offence may have been committed.
Why do an IVA?
The main advantage of an IVA is to avoid Bankruptcy. Bankruptcy causes legal restrictions, as well as requiring payments for three years, and, because of its public nature, there are invariably practical problems which occur for many years afterwards. With an IVA you can agree in advance the terms and conditions which you are willing to comply with. Many people are in jobs which they would lose if they became Bankrupt, such as in the financial services sector or professionals. By entering an IVA it is possible to keep working, which is of benefit to everybody. Another advantage of a Voluntary Arrangement is that under certain circumstances it can include creditors who would be excluded by Bankruptcy e.g. fines and matrimonial claims, but no longer student loans. The greatest advantage however to you is that you avoid the publicity stigma and permanency which are associated with Bankruptcy. The advantage to the creditors is that they are likely to receive more by way of dividend because of the savings in costs than they would if you were made Bankrupt.
Words of Caution
There are commercial organisations which advertise extensively promising to write off large parts of your debt at little cost to yourself. Whilst some are run professionally and may give you a good service, many simply offer “one size fits all” proposals which are not necessarily the best for your own circumstances. We like to meet you face to face so that we fully understand the extent of your difficulties before designing a tailor-made package of proposals specifically to suit your circumstances. In this way not only is there a greater chance that creditors will agree to your proposals but, more importantly, they do not put you under so much pressure that you cannot keep up your commitment. It is vital not only that the IVA is approved but that it succeeds.
An IVA does not necessarily make all your problems disappear. If you already have judgments registered against you, and because there is a central register of on-going personal insolvencies including IVAs, credit reference agencies will still be aware of your financial difficulties and at least during the period of the IVA you may experience some problems obtaining credit. For many people however this can be an advantage as they never want to be in debt again.
See also the section on Bankruptcy.