The Insolvency Act of 1986 (amended by the Insolvency Act 2000 and the Enterprise Act 2002) introduced a new procedure whereby a debtor could come to an arrangement with his/her creditors to pay the debts in full or in part over time as an alternative to bankruptcy. This arrangement is known as an individual voluntary arrangement (IVA) and may be entered into either before or after a bankruptcy order has been made.
There are two types of IVA’s. There are the ones for those trading and the ones for persons who only have credit card liabilities, known as consumer credit IVA’s.
Partnership Voluntary Arrangements (PVA’s) exist for those who trade in partnerships, but as stated previously, unless the partnership is going to pay 100p in the £ or the fact that the individual partners have no assets, IVA’s are done for each partner incorporating the partnership liabilities within their individual IVA.
An IVA begins with the debtor drafting a formal proposal to be put to his/her creditors to pay part or all of the debts. The debtor may even propose that the creditors agree to a deferment or postponement of their debts to some future time.
The debtor may make an application to the court for an Interim Order at an early stage, if there is a Petition for his Bankruptcy, but it is not compulsory. The Insolvency Act 2000 amendments which came into force on 1 January 2003 removed the requirement to apply for an Interim Order in every case to cut down on costs and delays in the IVA procedure. Applications for Interim Orders are now only done when creditors are in the process of taking precipitous actions. The main effect of an Interim Order is to prevent a bankruptcy petition being presented or proceeded with. It will also prevent other proceedings such as, execution being commenced or continued without leave of the Court.
An Interim Order will only be granted if no previous application has been made in the last 12 months. The Official Receiver, any Trustee and the Nominee should be given at least 2 days notice of any Interim Order application. The hearing will usually be in chambers before the District Judge or Registrar.
Once prepared the proposal will then be considered by the Nominee (an Insolvency Practitioner) who will make a recommendation to the Court as to whether the proposal is acceptable and viable. In practice the majority of proposals are prepared by the Nominee’s firm.
Once the proposal is final then this will be lodged with the Court to obtain a special number, unless an Interim Order is in place. Once the special number is obtained the proposal will then be put to a meeting of creditors. Creditors must be given 14 clear days Notice from day of receipt of such Notice convening the meeting. At the meeting the proposal must be approved by more than 75% of creditors voting. Additionally creditors may put forward modifications which if approved will supersede Terms in the proposal.
If the proposal is accepted at the meeting, the Nominee will then become Supervisor of the IVA and oversee its operation. Any agreement reached with the creditors will be legally binding.
If a person has been made bankrupt then he can still make a proposal to his creditors and should the proposal be approved then they will apply to the Court to have the Bankruptcy Order Annulled.
A voluntary arrangement with creditors offers flexibility to the debtor. It may include assets not normally available in bankruptcy, for example, the use of third party funds or income from the debtor's continued trading or employment. It gives the debtor more say in how his/her assets are dealt with, for instance, creditors may allow the debtor to exclude and retain certain assets such as his/her home. Also the restrictions which apply to a bankrupt are avoided.
The proposal must be comprehensive and must cover such matters as:
- An explanation why the debtor considers that the voluntary arrangement is desirable;
- give reasons why creditors may be expected to concur with the arrangement;
- The reasons/history that has caused the individual to apply for the Arrangement
- Particulars of the individual’s assets and how they are to be dealt with, if appropriate
- The manner in which the liabilities are to be dealt with, particularly secured creditors, preferential creditors, unsecured creditors and debts due to associates of the individual
- A Statement of Affairs showing the debtor’s Assets and Liabilities
- If the individual is trading their last or latest management accounts
- Income and Expenditure Schedule confirming the net amount the debtor can afford to pay. If the debtor is employed by his own company then the Accounts and Cash Flow of that company would also be disclosed
- Contributions payable and any assets that will be included
- Dividend payable to creditors
- A Comparison of the dividend payable to creditors compared between an IVA and Bankruptcy
- The duration of the Arrangement
- The name, address and qualifications of the Nominee and proposed Supervisor
- The remuneration of the Nominee and Supervisor
- Whether the business is to continue, and if so, on what terms
- The Supervisor’s banking arrangements
- Powers and duties of the Supervisor.
In order to make it likely that the creditors will accept the proposal, it should be credible and provide an acceptable alternative to bankruptcy.
The proposal will set out clearly the debtor’s obligations particularly as to the time and amount of contributions, so that there is no dispute over whether he/she has complied with the terms of the arrangement.
The Nominee must exercise professional independent judgment in making his/her report to Court or he/she can be made personally liable for the costs of any proceedings where the IVA is challenged successfully.
The debtor is required to give the Nominee access to his/her accounts and records so that the Nominee may consider the proposal. It is important for the debtor to provide the Nominee with accurate records of all his/her creditors’ names and addresses. If a creditor has been missed out from circularization they will still be bound.
The approved arrangement is deemed to be in force and effective from the date of the meeting. Any aggrieved creditor may make an application to Court and challenge the approval of the arrangement. This must be done within 28 days of the filing of the chairman’s report in Court.
An application to annul the bankruptcy order may not be made until 28 days after the chairman’s report of the creditors' meeting has been made to Court or whilst a challenge against the meeting's decision is pending.
The Insolvency Act 1986 identifies default by a debtor in connection with a voluntary arrangement as a ground for a bankruptcy order. A bankruptcy petition on this ground may be presented by the Supervisor or any other person bound by the arrangement (other than the debtor).
If the Supervisor is without funds, he may circulate to creditors a “Certificate of Non-Compliance” which states that the debtor has defaulted and the arrangement is at an end. This will leave the creditors or the debtor with the option of presenting a bankruptcy petition.
The debtor commits an offence if he/she deliberately misleads creditors, the Nominee or the Court for the purpose of obtaining approval of a voluntary arrangement. A person found guilty of such an offence is liable to imprisonment, a fine or both.