As an alternative to bankruptcy, an individual debtor might be able to persuade his creditors to agree to proposals to ‘settle his affairs’. IVAs are particularly useful (if no special circumstances warrant investigation) where some assets are available immediately for distribution.
Basic initial procedure
The basic initial procedure will depend largely on whether an interim order is required or not. The interim order provides the debtor with protection – a moratorium – from their creditors taking action against them personally (and their assets) until the IVA proposal is considered and voted on. Whether or not this is required will depend on the facts of each case. Generally speaking, an interim order is more necessary in cases where a risk of independent creditorled enforcement action threatens the success of the proposed IVA.
If an interim order is required
The debtor makes an application to court for an interim order (s.253 and rule 8). In addition the debtor makes proposals, usually with assistance from an insolvency practitioner or a person authorised by a body recognised by the Secretary of State for the purpose (and sometimes even after a bankruptcy petition has been presented against him), setting out proposals and details of the intended supervisor of the arrangement (rule 8.3) and prepares a statement of affairs (full details of his assets and liabilities) (rule 8.5). The nominee (usually the insolvency practitioner who has assisted the debtor with his proposals) submits a report to the court stating his opinion as to whether the arrangement has a reasonable prospect of being approved and implemented and whether a creditors’ meeting should be called (s.256).
The application for an interim order prevents a landlord from exercising any right of peaceable re-entry and/or distress for rent (without the court’s consent) and court permission is required before a creditor can take or continue with any action, execution or other legal process against the debtor or his property (s.254).
If the court thinks it appropriate, the interim order is granted in order to facilitate and implement the proposals. The order brings about a moratorium, freezing existing or proposed bankruptcy and other proceedings and legal process (including execution, landlord’s right of peaceable re-entry and/or distress for rent) against the debtor, without leave (in any such case) of the court (s.252). The interim order (and the moratorium) lasts 14 days (s.255(6)) which the court can extend, during which the nominee must submit his report to the court recommending that the proposals have a reasonable prospect of being approved and implemented and that creditors’ approval should be sought.
If no interim order is required
This procedure will be used where the debtor does not require the protection of the moratorium (granted as a result of an interim order). The debtor similarly makes proposals and prepares a statement of affairs both of which are submitted to the nominee (s.256A). If the nominee is of the opinion that the debtor is an undischarged bankrupt or is able to petition for his own bankruptcy, the nominee submits a report to the court within 14 days after receipt of the proposals and statement of affairs. The report gives his opinion as to whether the arrangement has a reasonable prospect of being approved and implemented and whether a creditors’ meeting should be called.
Creditors’ approval
The nominee must seek creditors’ approval to the debtor’s IVA proposal. That approval must be given through one of the statutory creditor decision procedures (s.257(2A). It is of interest to note that the traditional way of giving approval by a vote taken at a physical creditors’ meeting will now be the exception and not the rule.
Every creditor given notice of the debtor’s IVA proposal is entitled to vote on the proposal. An IVA proposal is approved if at least 75% by value of creditors voting on the decision respond in favour (rule 15.34(6)(a) but an IVA is not approved if more than 50% (by value) of creditors who are not associates of the debtor vote against it (s.258 and rule 15.34(6)(b)).
As with Company Voluntary Arrangements, secured creditors’ rights to enforce their security and preferential creditors’ rights to their preferential position cannot be affected without their consent (ss.258(4) and 258(5)).
Effect of approval
Approval of the IVA binds all creditors who were given notice of, and entitled to vote on the creditor decision and will also bind all creditors who would have been entitled to vote, had they been given notice (who are nevertheless entitled to claim as if they were party to the IVA). Any dissenting minority creditors who voted against the proposals are, and any creditors who were not given notice of the creditors’ meeting will be, entitled to challenge the creditor decision approving the IVA in circumstances where there has been a material irregularity or if the creditor’s interest has been unfairly prejudiced. The court has discretion and wide powers in those circumstances. As with CVAs, an IVA only becomes binding if it is not successfully challenged on these grounds. A challenge must be made within 28 days of certain trigger dates (the most important being the date the creditors’ decision was taken or the day on which the complainant became aware of the creditors’ decision).
Implementation of proposals – s.263
The nominee becomes known as the supervisor of the IVA with responsibility to implement the proposal and pay out dividends to creditors. He can apply to the court for directions and must report to creditors and the court periodically on progress.
Advantages of IVAs
- The debtor can avoid going into bankruptcy.
- The IVA will bind dissenting creditors.
- A moratorium is available if an interim order is made.
- Generally, they are flexible, fast and effective.
However, with the usual term of an IVA being several years (and likely to involve income payments to creditors for that period), bankruptcy (see below, in particular regarding the shortened discharge period) may now be seen by the debtor as the softer option.
Arrangements outside of IVAs
A non-bankrupt debtor is free to reach a settlement with individual creditors. Consumer debtors are generally advised to do so by the Citizens’ Advice Bureau. No particular formalities are required. However, if the debtor is
proposing a composition with three or more of his creditors or his creditors generally, there is the possibility that the written agreement could require registration, or a trustee be required, under the Deeds of Arrangement Act
1914.