ESCAPE THE INSOLVENCY MAZE BUT ONLY WITH YOUR CREDITORS HELP
In December 2022 there were 1'979 Debt Relief and 397 Individual Bankruptcy Orders made in England & Wales. Despite being now 2 years post-pandemic, the number of creditor petitions forcing debtors into bankruptcy was 3% higher than in December 2021.
In the backdrop of rising interest rates, soaring inflation and scaling back of government support, this article will provide a brief introduction to Individual Voluntary Arrangements (IVAs) their advantages/disadvantages compared to bankruptcy and how a creditor may challenge them.
WHAT IS AN IVA?
An IVA is a formal insolvency procedure that operates as a contractual arrangement between a debtor and all their unsecured creditors. The purpose of an IVA is to enable a debtor to reach a compromise with their creditors by making funds available out of their assets, income, or both. Ultimately, a debtor will seek his creditors agreement to an IVA in order to avoid the restrictions and stigma of bankruptcy.
Consequently, when seeking an agreement to an IVA, debtors will commonly propose larger repayments to their creditors than would be forecast in a bankruptcy. Alternatively the creditors may include an equity release clause whereby the debtor agrees to apply for a secured loan or re-mortgage towards the end of the term to pay into their IVA.
Throughout 2022, there were 87'967 IVAs registered in England & Wales which was the highest recorded figure in the time series going back to 1990 and demonstrates their mutual advantages to both creditors and debtors.
ADVANTAGES TO BANKRUPTCY
As with bankruptcy, the debtor will be subject to the supervision of an insolvency practitioner whom will collect payments and distribute them to the creditors. The IVA will also be recorded on the Insolvency Register and the debtor’s credit rating will suffer from similar near-terminal consequences.
However, an IVA affords distinct advantages to both parties which for the Debtor includes:
Continuing as a director or officer of a company.
Allows a sole trader or partnership to continue trading in order to generate income for paying creditors.
Flexible proposals are drawn up by the debtor to accommodate their personal circumstances.
An interim-order provides an absolute bar on presenting or proceeding with a bankruptcy petition against the debtor while the order is in force. Thereafter and if approved, an IVA binds all creditor even those whom voted against it.
Avoids the stigma, restrictions and effects of bankruptcy, such as not being able to apply for personal credit.
For homeowners, an IVA can provide property protection as when in bankruptcy, the Trustee must make a decision within 3 years as to whether or not to sell the family home.
And for the Creditor:
Higher and potentially longer lasting returns.
The cost of administering an IVA is considerably lower than that of a bankruptcy estate.
Tax and VAT bad debt relief may still be claimed.
In the event that the debtor breaches the terms of an IVA, the creditors can still compel the supervisor to make the debtor bankrupt.
THE DEBTOR'S PROPERTY & FAMILY HOME
Should the debtor own their home or another such property then their IVA proposal should include a special section referred to as an 'Equity Clause'.
The standard Equity Clause means that during the IVA (usually the 5th year) the debtor would be expected to apply for a secured loan or re-mortgage to pay back some of the debt. In the event that the debtor is unable to do this, then their Supervisor may chose to sell the debtor's home instead.
Providing your IVA has been drafted to follow the IVA Protocol, there are 3 options for dealing with the debtor's Property which are dependent upon the value of the Debtor's share of the equity:
Equity is £5000 or less: The IVA Proposal will be for instalments over a 5 year period and the debtor will NOT be asked to release equity in their home.
Equity is >£5000 but the Debtor cannot re-mortgage or secure a loan: The IVA proposal will be for instalments over a six-year period and the debtor will not be asked to release equity in their home. The Supervisor will assume that the Debtor cannot release equity if:
The debtor is >60 years old at the commencement of the IVA or;
The spare income for the household after covering essential bills is <£100 a month or less.
Equity is >£5000 and the Debtor can re-mortgage or secure a loan: The IVA proposal will be for instalments over a 6-year period with valuation review of the Property after 54 months. Thereafter;
Providing the debtor's share of the equity is at least £5000 when it is reviewed, the debtor will be expected to apply for a secure loan or re-mortgage to pay back some of their debts.
Subject to the debtor being able to re-mortgage or secure a loan, the debtor should be left with at least 15% of their share of their equity in the Property and the new mortgage should finish by the end of the existing mortgage or the debtor's state retirement age (whichever is later). Providing the debtor does release the equity, then the IVA will be reduced from 6 to 5 years.
However, if the Debtor's share of the equity falls below £5000 when it is reviewed or the debtor is unable to remortgage or secure a loan, the debtor will need to keep paying instalments under the IVA until the end of the 6 year IVA term.
Alternatively, the IVA could end after 5 years but this is contingent on a third party providing lump sums that are equal to 12 month's work of payments under the IVA.
Ultimately, what happens to the debtor's Property depends up the terms of the IVA proposal and any debtor or creditor wishing to consider an IVA would benefit from seeking independent legal advice.
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PROTECTION FROM CREDITORS
Baring the above protection, the most immediate advantage to a debtor formulating an IVA proposal is the right to apply for an interim court order in order to prevent further enforcement (i.e. Bailiffs) or the creditor's commencement of new proceedings.
This interim-order has the effect of a moratorium over the debtor and the debtor’s Property as soon as the application is issued. Ordinarily the interim-order will cease to have effect after 14 days but may be extended by a further 14 days if Insolvency Practitioner needs time to prepare his report to the court.
It is rare for the court to lift the moratorium but an IVA can be successfully challenged in cases of unfair prejudice and/or material irregularity.
CHALLENGING AN IVA
To come into force, an IVA needs the approval of 75% of the debtor's creditors and thereafter, an IVA binds all the debtor’s creditors, whether or not they voted in favor or were even aware of the the decision procedure approving proposals.
Nonetheless, pursuant to s.262 Insolvency Act 1986, a creditor may still seek to overturn an IVA and such a challenge must be brought within 28 days of the creditors' decision to approve the IVA (or in the case of a creditor whom had not been contacted within 28 days they became aware of the decision). The common ground that are listed in s.262(1)(a) & (b) are that:
The IVA unfairly prejudices the interests of a creditor and/or;
There was a material irregularity in relation to the creditors' decision procedure by which the IVA was approved
Regretfully, there is no statutory definition as to what constitutes ‘unfair’ or ‘prejudice’ and each element must be considered in tern. But in general, the court will assess whether the IVA differentiates in its treatment of creditors. Equally, ‘material irregularity’ is not defined and whether or not such an irregularity in the decision making process will be enough for the court to overturn an IVA will depend on the facts of its case.
In all cases, pursuant to s.262(8) Insolvency Act 1986, a challenge to an IVA can only be pursed in accordance with the statutory scheme. This means that you challenge will need to be based on strict legal definitions divergence from which could result in a cost sanction against you.
HOW WE CAN HELP
We have successfully acted for creditors looking to challenge the terms of an IVA both on the grounds of unfair prejudice and material irregularities. During these hearings, we have successfully recovered our clients costs and thereafter, secured our client’s interests with a successful charging order over the debtor's assets protecting our client's financial security.
For more information, contact us today for up to 30 minutes free confidential legal advice.
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