The Insolvency Act of 1986 (amended by the Insolvency Act 2000 and the Enterprise Act 2002) introduced a new procedure whereby a debtor could come to an arrangement with their creditors to pay their debts in full or in part, over time as an alternative to bankruptcy.
This type of arrangement is known as an individual voluntary arrangement (“IVA”) and may be entered into either before or after a bankruptcy order has been made.
If a Bankruptcy Order has been made against an individual it is possible for it to be annulled pursuant to Section 282(1) Insolvency Act 1986, which effectively returns the bankrupt to their original position.
What is an IVA?
An IVA is a legally binding agreement between an individual and their creditors to pay part or all of their debts in full. The debtor may even propose that the creditors agree to a deferment or postponement of their debts to some future time. An IVA usually lasts for five years with monthly payments being made to creditors, and if adhered to will provide protection from creditors being able to take further action against the debtor.
An IVA begins with the debtor drafting a formal proposal to their creditors. The prescribed content of the proposal can be found in the Insolvency Rules 1986 (as amended) and the Insolvency Rules (England and Wales) 2016. The debtor may make an application to the court for an interim order at an early stage, but it is no longer compulsory. An interim order has the effect of preventing a bankruptcy petition being presented or proceeded with. It also prevents other proceedings such as, execution being commenced or continued without leave of the court.
Once the proposal has been drafted it will then be considered by a nominee (an insolvency practitioner) who will make a report to the court or to the debtor’s creditors as to whether the proposal is acceptable and viable. If it is, then the proposal will be put to a meeting of creditors. If the proposal is accepted at the meeting, the nominee will then become supervisor of the IVA and oversee its process. It is important to note that any agreement reached with the creditors will be legally binding.
How does an IVA get approved?
Creditors decide whether or not they approve an IVA. A proposal must contain an individual’s best offer, and provide a higher return on the repayment of the debt compared to bankruptcy.
Creditors votes are calculated by reference to their sterling value. 75% of votes cast need to be in favour of the voluntary arrangement. It may be that creditors will agree to the proposal on the condition of a modification. An individual has up to 14 days to think about any modification(s) put forward by a creditor(s) before accepting. If the modification(s) are agreed, the IVA will be approved.
What happens once my proposal is approved?
Once creditors approve the proposal the arrangement becomes legally binding from the date of the creditors meeting and an application to annul the bankruptcy order can be made 28 days after the chairman’s report of the outcome of the creditors' meeting has been made. It should be noted that if the bankruptcy order is not annulled after 28 days, the individual will still be subject to the restrictions placed upon them following bankruptcy.
It should be noted that if the terms of the arrangement are not adhered to, namely arrears are incurred over a specific time (normally 3 months), the supervisor has the ability to terminate the IVA due to the breach which may result in the individuals bankruptcy.
The cost of an IVA varies. An Insolvency Practitioners role changes throughout the course of the process from an advisor, nominee and then supervisor and each role has a cost. A lot depends on how complicated an IVA is, how long it will last for and who and how many creditors there are. However, the usual cost to instruct an insolvency practitioner to draft a proposal will be in or around £2,500 - £5,000.
If you have been declared bankrupt or there is a bankruptcy petition looming, it is in your best interest to make an application for an IVA as soon as possible. This is because the consequences of bankruptcy, such as an Official Receiver / Trustee having control over your assets; namely your matrimonial home, inability to act as a director of a limited company, obtain credit and operate a normal bank account will cause considerable problems.
This guest article was written by Carisse Hollet at Frost Group