Individual Voluntary Arrangements - The Detail

A full explanation of Individual Voluntary Arrangements (IVAs) could go on for pages, so we have tried to include in this article, an outline of the main things you should know before agreeing to an IVA. Every IVA is different, tailored to the needs of the individual and each should be read and fully understood before putting a proposal to creditors.

An Individual Voluntary Arrangement is, generally, a contract between a person and their creditors. Most IVAs are agreements based upon settling your debts in full within a specified period of time. You should note, however, that settlement "in full" may not mean that the creditor receives full payment of their outstanding debt. In fact, most IVAs  are based upon creditors agreeing to accept less than they are owed.

• Reasons for doing an IVA
• Will doing an IVA prevent me getting credit?
• Is an IVA a public process?
• Who can do an IVA?
• What assets should be included in an IVA?
• Can I carry on business if I have entered into an IVA?
• Will assets that secure borrowings be included in an IVA, e.g. the matrimonial home?
• What assets can be excluded from an IVA?
• Can someone else contribute into the IVA?
• Can I pay off the IVA early?
• What happens if the information given in a proposal is wrong?
• What happens if you default in an IVA?
• How do I propose an IVA?
• The Legal form of an IVA
• The Nominee
• The Creditors' Meeting
• Agreeing the IVA
• The Supervisor
• What if the Nominee or the Supervisor misbehaves?

• Relief from the pressure of constant demands from creditors.
• Certainty about what has to be paid and when.
• Once the Arrangement is completed the debts are settled in full.
• The ability to negotiate a single deal with all unsecured creditors.
• Avoiding more extreme enforcement measures by creditors, including bailiffs or bankruptcy.

The benefits for creditors can include;

• An end to costly enforcement proceedings.
• Certainty about the final sums that they will receive.
• A larger and quicker return than if the individual goes into bankruptcy.

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Will doing an IVA prevent me getting credit?
There is no statutory bar to obtaining credit for those in an IVA. However, all IVAs are registered centrally and the fact you are in an IVA will be picked up by credit agencies. This will affect your credit rating for at least six years.

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Is an IVA a public process?
Whilst the exact terms of an IVA are private to the individual and their creditors, the name and address of the individual is recorded at a central registry which is open to public search.

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Who can do an IVA?
Nearly anyone can propose an IVA. Even a bankrupt can put forward an IVA and get an early annulment of the bankruptcy, but only if they have not already been discharged. 

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What assets should be included in an IVA? 
Any asset that can be sold or realised and would be available in bankruptcy, should be included in an IVA. Creditors will expect most valuable assets to be included, e.g. equity in a property, any savings, a life policy, significant jewellery or a valuable car.

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Can I carry on business if I have entered into an IVA?
Yes. However, most IVAs for the self-employed will contain provisions for monitoring the business and include certain restrictions on credit. IVAs involving businesses, therefore, require specialist advice for the debtor and a more detailed proposal to creditors.

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Will assets that secure borrowings be included in an IVA, e.g. the matrimonial home?
Those assets which secure borrowings cannot be sold or realised without the consent of the lender.  If there is 'equity' in a secured asset, i.e. its value is in excess of the amount owed, unsecured creditors will expect this to be taken into account within the IVA proposal. 

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What assets can be excluded from an IVA?
As certain personal assets cannot be included in bankruptcy, creditors will rarely demand their inclusion in an IVA. Examples are –

Tools of trade.
A vehicle that is essential to a person for their work.
A pension fund.
An award of personal damages eg. for pain and suffering, in a personal injury action.

Having said this, if a person has a strong wish to avoid bankruptcy and has little else to offer, they may choose to include these assets in their IVA proposal.

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Can someone else contribute into the IVA?
Often the funding for IVAs can be supplemented, or even fully provided, by a third party – a friend or family member. Sometimes even a small contribution from family can be enough to gain the favour of creditors who might otherwise react badly to a low offer.

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Can I pay off the IVA early?
Unlike loans there will not be any penalty for paying off an IVA early. In fact, if an early completion of payments can be managed, creditors may allow the final sum to be reduced in return for getting their money sooner.

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What happens if the information given in a proposal is wrong?
If there is a small error this will usually be ignored, but if the mistake seriously misled the creditors as to the extent of either a person’s assets or liabilities, this can result in the failure of the IVA and eventual bankruptcy. If it is proven that there was a deliberate intent to mislead, this will be treated as a criminal offence.

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What happens if you default in an IVA?
Small, short-term defaults will usually be met with just a warning as long as the default has been made good. Persistent or serious default can, however, result in the failure of the IVA and bankruptcy. 

Where the default appears to be beyond the control of the debtor, most IVAs will allow the Supervisor to ask the creditors for an extension of time or a variation in terms. The most common causes are where a self-employed person suffers a dip in income over a short period, or there is some delay in achieving the sale of an asset. As long as there is no outright loss, the creditors will usually accept a Supervisor’s recommendations to vary the terms of the arrangement.

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How do I propose an IVA?
The formal process of getting agreement to an IVA begins with creating a Proposal. This is usually done with the help of a Licensed Insolvency Practitioner,  who is the Nominee.

The simplest proposals involve nothing more than raising a mortgage on a property and paying the money into the IVA.  The Supervisor will then pay this to the creditors in sums proportionate to what they are owed. This kind of Arrangement is easy to administer and can be completed in as little as 3-4 months after receiving the funds.

If you have no property, or very little equity,  you may still be able to fund an Arrangement from contributions from income – say, £500 per month over 5 years.  Arrangements based solely on income are more expensive to administer and because the Supervisor's fees are paid from the contributions into an IVA, creditors will be wishing to maximise and keep under constant review available income and contribution levels. You should only agree to such a long term commitment if you are confident of making it work and have a good reason to avoid bankruptcy.

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The Legal form of an IVA
You should contact  a Licensed Insolvency Practitioner who can help with drafting the legal documents and act as Nominee.

Although there is no fixed form for IVAs, there are certain legal requirements to which the proposal must conform. It must;

• Contain a full statement of all of a person’s assets and liabilities, including any which may only be contingent (e.g. a claim by a creditor which is disputed in court proceedings).
• Disclose details of any charges or mortgages given over any property.
• Be for a defined period.
• Provide for some payment to creditors.
• Show clear advantages over bankruptcy (i.e. a realistic chance of a better, or more certain or quicker realisation than in bankruptcy).

The proposal must also be examined and certified by a Nominee as legally complete, fit, fair and having a reasonable chance of suceeding, before it can be sent to creditors. Only a Licensed Insolvency Practitioner can act as Nominee of an IVA.

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The Nominee
As well as helping draft a proposal and certifying its fairness, fitness and that it has a reasonable chance of succeeding, the Nominee is responsible for sending the proposal to creditors and presiding over a meeting of creditors convened to consider whether to accept it .

For each of these functions the Nominee will expect to receive a fee and this must be declared in the proposal. The Nominee must also take steps to ensure that the individual is well informed about the process they are entering into. All Licensed Insolvency Practitioners must give any prospective applicant for an IVA a copy of a leaflet entitled “Is a Voluntary Arrangement Right for Me”, before they proceed.

Further details about the functions of the Nominee are contained in that leaflet. You will find a copy of this leaflet in our Debt Articles.

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The Creditors' Meeting
After the proposal has been prepared and certified as fit by the Nominee, it must be sent to creditors with notice convening a meeting which must take place between 14 and 28 days thereafter. The purpose of the meeting is to allow creditors to vote on the proposal. They may require the applicant’s agreement to modifications of the proposal.

In practice few meetings are attended by many creditors, who generally prefer to lodge their votes by post and discuss any proposed modifications over the telephone.

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Agreeing the IVA
Providing more than 75% of those creditors, in value, voting at the meeting support it, the proposed Arrangement will be binding upon all unsecured creditors. If agreement cannot be reached, the meeting can be adjourned to discuss modifications that all parties find acceptable.

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The Supervisor
Once the proposed Arrangement is agreed it is administered by a Supervisor (usually the Nominee). Only a Licensed Insolvency Practitioner can act as Supervisor. As with the Nominee, the terms on which the Supervisor will be paid must be fully disclosed to all those party to the IVA and must be approved by creditors. The Supervisor's fees will normally be met from the contributions made into the IVA. 

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What if the Nominee or the Supervisor misbehaves?
As a Licensed Insolvency Practitioner, every Nominee and Supervisor is subject to regulation by their professional body. The main licensing bodies in England & Wales are :

The Insolvency Practitioners Association
52-54 Gracechurch Street, London, EC3V 0EH

The Institute of Chartered Accountants in England & Wales
Professional Conduct Directorate, 412-416 Silbury Boulevard,
Central Milton Keynes, MK9 2AF

The Association of Chartered Certified Accountants
29 Lincoln's Inn Fields
London, WC2A 3EE

The Law Society
Office for the Supervision of Solicitors, Victoria Court, 8 Dormer Place,
Leamington Spa, Warwickshire CV32 5AE

Relief4Debt is headed by Steve Smith. Steve Smith and his insolvency partners at Mercer & Hole are licensed by the Institute of Chartered Accountants in England & Wales.

This article has been written for Relief4Debt, a division of Mercer & Hole, Chartered Accountants.  It should not be relied upon solely without further enquiry and/or detailed consultation with one of Relief4Debt's suitably qualified advisors.