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Individual Voluntary Arrangements ("IVA")

The IVA procedure has been with us since 1986 and has proved to be an effective alternative to bankruptcy for individuals with insurmountable debt problems. How does it work and who might benefit?

The IVA is an agreement between an individual ("the debtor") and his/her creditors. It is a formal procedure under the Insolvency Act 1986 and is controlled by a licenced insolvency practitioner ("IP"). It is available to anybody who is insolvent (i.e. they cannot pay their debts as and when they fall due) and able to petition for their own bankruptcy. It can also be put in place for individuals who are already bankrupt.

Who will benefit from an IVA?

The vast majority of individuals who enter into an IVA do so because they wish to avoid bankruptcy. Bankruptcy has different consequences for different people. A professionally qualified person such as an accountant or solicitor may have his practicing certificate suspended if he is made bankrupt and a bankrupt cannot be a director of a limited company or engage in any business other than in his own name. Certain employers such as those in the financial services industry may have rules about employees who are made bankrupt.

An IVA can help a debtor to keep control of his finances and is often used to prevent a debtor from losing his house. Another benefit is that whilst the IVA is registered by the Secretary of State and with the Court, it is not advertised in the local press as is the case in a bankruptcy.

However IVA is not appropriate for all people and it is important that a debtor discusses all the options with an IP.

How to find an IP

There are many organisations who claim to be able to advise individuals with debt problems. Some say that they can put together IVA proposals, but unless they are a licenced IP they cannot take a formal appointment.

Most IPs advertise in the Yellow Pages under the R3 banner. R3 (Association of Business Recovery Professionals) is the trade association for IPs and under an agreement with Yellow Pages only those with suitable qualifications are permitted to advertise as insolvency practitioners. R3 also has a list of IPs on its website www.r3.org.uk.

What will the IP do?

The IP should ask to meet the debtor in order to discuss the circumstances and they should advise you on the pros and cons and costs of the options available.

The regulators have become concerned about the activities of some firms who allow unlicenced advisers to prepare the IVA proposal to which the IP then puts his name without ever speaking to the debtor. In June 2002 the regulators issued guidance to all IPs about how they should deal with IVAs.

The IP or a suitably qualified member of his staff should meet with the debtor. The IP must set out his advice in writing and give the debtor a booklet produced by R3 called "Is a Voluntary Arrangement right for me?" The IP should not charge any fee until the debtor has had a chance to read the booklet and confirm that they have understood its contents.

Once the debtor has made the decision that IVA is the appropriate route and the IP has confirmed that he is prepared to act, the IP will help to prepare proposals to be put to creditors. The proposals will set out the circumstances which have led to the debt problems, detail any assets which and list the creditors. It will then set out what money will be made available to enable payments to be made to creditors and how long the IVA will last. It will also detail the functions of the IP and how he will be paid for his work.

What will the creditors accept?

This will depend entirely upon the circumstances of the debtor, but the creditors will expect the prospects of recovering money to be at least as good as in a bankruptcy.

Many IVAs are based upon contributions made over a period of time. It is usual for the proposals to provide for the payments to be made over a period of at least three years. This is because if a debtor is made bankrupt and has sufficient income to make contributions to their estate then they will be required to do so for three years.

If the IVA is based upon contributions only then it is common practice for the major creditors to insist upon the contributions being made for five years. The reasoning is that for the creditors to accept the IVA they should be offered something more than they would get in a bankruptcy. The saving in costs of an IVA against bankruptcy is usually not considered to be sufficient.

How does the IP get paid?

The IP's fees are usually taken from the payments made into the IVA. However he may want to receive an advance payment against his costs which will be incurred in preparing the documents for consideration by creditors. This is because if the creditors reject the proposals then he will just become another creditor for his costs.

The IP may be prepared to take a risk on these costs if he thinks the IVA has a good chance of approval, but there can be no hard and fast rules on costs. However it would be unusual for an IP to seek payment for his initial meeting with a debtor. If he does then try someone else!

What is the process?

An IP must be instructed to act as the debtor's Nominee. He must confirm that he is suitably qualified and prepared to accept the appointment.

The proposals must be prepared ready for filing in Court. Under the Insolvency Act 2000 there is the option to apply to the Court for an interim order which will immediately freeze any proceedings being taken against the debtor, or to simply file the papers without a formal application. The decision will depend upon the circumstances, but an application for an interim order will result in additional costs.

Once the proposals have been returned by the Court it is necessary to convene a meeting of creditors to seek approval of the proposals, with or without modifications. To obtain approval it is necessary for 75% in value of those creditors who attend and vote at the meeting of creditors either in person or by proxy to vote in favour of the IVA.

For example, if a debtor has creditors of £100,000, but votes are received from only £50,000 worth of creditors, then the IVA will be approved if the claims of the creditors voting in favour of the proposal total at least £37,500. All the creditors will be bound by the decision even though they did not vote, provided that they received notice of the proposals and the meeting.

If the proposals are approved then the insolvency practitioner becomes the Supervisor of the IVA. His role is to deal with the assets as set out in the proposal, agree the claims of creditors and make distributions under the terms of the IVA.

The IVA is in effect a contract between the debtor and the creditors and the Supervisor must apply all the terms to the letter. Therefore if the terms say that the Supervisor will fail the IVA if the debtor fails to comply with any of the terms, then he must do so. However most IVAs allow some flexibility when dealing with breaches. A well drafted IVA should contain the R3 standard conditions which set out what action the Supervisor should take in most circumstances which are likely to arise.

What information should the debtor reveal?

It is most important than the debtor tells the IP everything about their financial circumstances and may sometimes need to give some quite personal information as background. If the debtor withholds anything and this comes out later then the IVA will almost certainly fail.

An experienced IP should understand that this is a very sensitive time for an individual and deal with them in an appropriate manner, but if the debtor does not like the IP's approach then they should not be afraid to pick up the phone to someone else.