An IVA is an agreement between an individual and his creditors, which is entered into as an alternative to Bankruptcy.
Often sole traders hit problems that they are able to resolve, but the after effects can last for several months, or even years. Typical examples may be, a substantial bad debt, a loss making contract or a shift in the marketplace, necessitating a restructuring plan. Such problems usually devour substantial levels of cash, leaving the trader in a position where he cannot keep up with payment of the costs he incurs on a day-by-day basis in the ordinary course of his business.
Provided the business going forward is viable, an IVA may be the solution that gives the trader time to put his affairs on a proper footing. The process may also be used to deal with the position of partners whose partnership is in a Partnership Voluntary Arrangement (“PVA”).
First and foremost, there must have been a change in the way in which the business is run. If a business has habitually lost money and there has been no such change, it will continue to lose money. The trader must have isolated the reasons for the losses and taken steps to eradicate them. If that is done, the chances are that the business will be viable in the future.
Secondly, the trader must be capable of providing information that will enable his advisers to prepare reliable forecasts of profit and loss and cashflow, that will stand up to detailed, critical scrutiny.
If those two conditions are satisfied, there is a reasonable prospect that an IVA will not only be approved by creditors, but that it will also work.
The process can take a little time to put in place, since, once the forecasts referred to above have been prepared, the trader must prepare a written proposal to put to his creditors. The IVA process is governed by the Insolvency Act 1986. Accordingly, its content must comply with the requirements of the legislation and Insolvency Rules. For this reason, the proposal is often prepared by a Licensed Insolvency Practitioner.
Once prepared, the Licensed Insolvency Practitioner will act as the Nominee to the proposal. His function in that capacity is to prepare a report on the proposal, commenting mainly on its viability and whether he believes meetings of the trader’s creditors should be convened to consider the proposal. If he reports favourably, he will then convene the meeting and act as its chairman.
Creditors are not obliged to accept an IVA proposal and at their meeting, they will decide whether to vote in favour of it or not. In the majority of cases, creditors do not attend the meeting, but they vote by proxy. When they do vote, they can do one of three things:
1. They can vote in favour of the proposal as drafted.
2. They can vote against the proposal.
3. They can propose modifications and vote in favour of the proposal on the express condition that those modifications are incorporated into the proposal, and agreed by the requisite majority of creditors.
The modifications proposed by creditors usually place additional onus on the trader to further protect the interests of the creditors. They can however only be voted upon if the trader agrees to them.
For a proposal to be accepted it must have the support of at least 75% in value of the creditors who vote on the day. In other words every £1 owed equals one vote. If that majority is achieved and there are connected creditors, such as associated businesses or members of the traders’ family, voting, then a second vote must be taken, excluding those connected creditors and if after taking that vote, more than 50% in value of the unconnected creditors vote against the proposal’s acceptance, the IVA is rejected.
If the proposal is accepted, it becomes binding on all creditors, whether they voted in favour of it or not.
At all times, the business remains under the control of the trader. The proposal will usually provide for payments out of future profits to be paid on a monthly basis to the insolvency practitioner, who following his approval becomes the Supervisor of the proposal. These monthly payments are likely to continue for a period of years, often between three and five.
The Supervisor will hold the funds received, on trust for the creditors, and they will be paid to them periodically, after deduction of the Nominee’s and Supervisor’s fees. It may be that the payments made to creditors through the IVA will result in them being paid in full, in which case, they may be entitled to interest at the prevailing rate, which is currently 8% per annum. Often however, the proposal will have indicated that creditors are unlikely to be paid in full and in those cases the payments they receive are accepted in full and final settlement of their claims against the trader.
There are of course, potential downsides to an IVA. Commercially, the trader may have difficulty in obtaining credit from his suppliers and if he can, it will be a condition of the arrangement that he meets all future liabilities to all creditors including HMRC as they fall due. Failure to do so will result in the trader defaulting in his obligation.
In addition, an IVA is a contract that the trader must abide by. He must make the payments he is contracted to make and adhere to all of the provisions of the proposal. If he does not, he will be made Bankrupt.
There will be provision for the proposal to be varied, in the event that something unexpected occurs that results in the trader being temporarily unable to honour his obligations, but such variations must be put to the creditors in general meeting and the same voting principals will apply as did at the original meeting. There can be no guarantee that creditors will agree to a variation. A trader must be aware that the approval of an IVA is a concession granted by creditors and that it may be difficult to persuade them that a further concession is in their best interest. If it is, they are likely to vote in favour, but if not, then they may not.
At the time an IVA is proposed, it is often the case that the trader is under pressure from his creditors. It is always possible therefore that one or more creditors may take precipitative action before an IVA is approved. There is however a remedy to avert this threat.
It is possible, once the proposal is drafted to make an application for an interim order when the proposal is filed in court. This effectively prevents any creditor from taking or completing any legal actions against the trader until after the meeting of creditors is held and the proposal voted upon.