Personal Insolvency

Voluntary Arrangements

These procedures were introduced by the Insolvency Act 1986 and enable an individual, partnership, or limited company to put forward a deal (the proposal) to creditors as an alternative to bankruptcy or winding up.

Once accepted by at least 75% by value of creditors voting, the arrangement is legally binding on all creditors whether they voted or not. Most voluntary arrangements involve the debtor making monthly payments out of their income.

THE PROCEDURE FOR AN INDIVIDUAL VOLUNTARY ARRANGEMENT (IVA)

1. The first stage is the preparation of the proposal, in which the debtor must disclose all of their assets and liabilities. A licensed insolvency practitioner acts as nominee and in practice prepares the proposal based on information provided by the debtor. Although the proposal is prepared by the nominee, the debtor is responsible for its contents.
2. The proposal is filed in court.
3. If necessary because of the creditor pressure, the court grants a 14 day interim order under which no creditor can commence or continue with any legal process against the debtor. An interim order does not however give protection against a landlord who has a common law power to distrain for unpaid rent.
4. If an Interim Order has been obtained, then the nominee prepares his report to the court and concludes on whether or not he consider that a meeting of creditors should be held. If no Interim Order has been obtained, the nominee's report and comments are filed at the same time as the proposal.
5. If an Interim Order was obtained, upon receiving the nominee's report and comments, the court extends the interim order to give the debtor protection until after the meeting has been held.
6. Creditors are sent a copy of the proposal and nominee's report together with a proxy form either once the application has been filed if no Interim Order is obtained, or after the Court has extended the Interim Order.
7. The meeting of creditors is held. The meeting may be adjourned for up to 14 days to obtain agreement on proposed modifications.

LET'S LOOK AT AN EXAMPLE

Mr J C had unsecured debts totalling ?108,953. These were made up of loans and credit card borrowings used to pay for household improvements and domestic appliances. When he divorced, the matrimonial home was sold leaving a shortfall to the building society of ?36,264, which was the largest debt included in the list. After the divorce, his mother lent him ?11,200 to buy his current property.

If he were to be made bankrupt, he would lose his house but not his job.

After paying his mortgage and essential living expenses, he had ?350 left over each month and decided that he could afford to pay ?320 per month. He also proposed to re-mortgage his house to raise a lump sum of ?10,000.

The estimated outcomes under IVA and bankruptcy are as follows:

Creditors totalling ?49,436 voted and 96.75% of these accepted with the modification that the debtor's mother was not to rank for dividend. This had the effect of increasing the return to the other creditors to 24.7 pence in the pound.

COMMONLY ASKED QUESTIONS

How much will it cost?

At Portland, we offer a free initial consultation, with no up front fees as a hefty fee is the last thing a person in debt needs. Beware of the practitioners who ask for a substantial down payment before commencing any work.

All we ask is that the first two monthly contributions are paid before the date of the creditors' meeting. Should the proposal be rejected at the meeting, we take this on account of our fees and write off the shortfall. There is nothing further to pay.

Should the proposal be accepted, then we take our fees out of the pot before making a distribution to creditors, so that our fees do not hit the debtor directly. Typical charges for an average 5 year IVA would be ?1,500 + VAT for preparing the proposal and convening the meeting of creditors and an annual supervision fee of between ?500 and ?700 + VAT.

What are the chances of my proposal being accepted by creditors?

The majority of proposals are accepted as national statistics show that the average return to unsecured creditors under voluntary arrangements is 40 pence in the pound compared to just under 10 pence in the pound in bankruptcies. The national average acceptance rate is 64%.

At Portland, the acceptance rate for IVAs since April 1996 has been 86% in 188 cases.

What influences creditors' decisions in voting?

Most creditors would rather receive more pence in the pound than less, but also to be considered is the timing of payments. If a debtor had a large amount of equity in his house, this would normally be realised and creditors paid out before the end of the second year under bankruptcy. Under a contribution based IVA, creditors would have to wait 5 years for the proposed dividend as during the first 2 years, most of the contributions would be absorbed by costs.

Most banks and credit card companies appoint one of the large accountancy firms to vote on their behalf and will not normally consider a proposal offering less than 25 pence in the pound unless there are exceptional circumstances.

The Inland Revenue and HM Customs & Excise vote together on proposals. They have no minimum dividend requirement, but will normally reject a proposal where the debtor has a long history of non-compliance.

Creditors also want to see that the debtor is doing their best and suffering some pain. You only get one attempt at an IVA. If the proposal is rejected, it is no good coming back with a better offer. You will have lost your credibility and creditors will almost certainly reject it. You should have done your best with the first offer.

Advantages

An IVA is a private deal and the only people who get to know are the creditors bound by it. The arrangement is however recorded on a public register with the Secretary of State. This will mean that the arrangement will be noted on your credit rating. Unlike bankruptcy, it is not advertised and there is no need to contact your employer.

A self employed person can continue with his business.

The debtor keeps their job. Bankrupts are automatically disqualified from many professions such as law and accountancy.

The family home can be saved.

For debtors with loans and credit card debts, the monthly payments under an IVA will be considerably less than their current minimum monthly payments.

Disadvantages

It is usually more onerous than bankruptcy in that 5 years is viewed as standard compared to 1 year for most bankruptcies, although payments into your bankruptcy from earnings can continue for up to three years. The monthly contributions will also be much higher than a corresponding income payments order under bankruptcy, but this is the price the debtor must pay for keeping his house and job. Although the family home is saved in most cases, creditors will expect the debtor to release some of the equity in it towards the end of the arrangement by way of remortgage. This is because by making the mortgage repayments, the debtor has acquired an asset for themselves by increasing the equity in the property, but if the payments had not been made, then the money would have been available for creditors.

The debtor may have to face their creditors at a meeting. It is a statutory requirement to hold a meeting of creditors, the idea being that the debtor and their creditors sit round a table to thrash out a deal. In practice, it is rare for creditors to attend a meeting except in the larger cases and all of the voting is normally by proxy. At Portland, we pre-empt in the nominees report most of the questions creditors would be likely to ask so that there is no need for them to attend the meeting.

Credit reference agencies such as Equifax and Experian keep records of IVAs on their books for 6 years, but the effect is not nearly as damaging on future credit prospects as bankruptcy. For example, it is possible for a debtor in an IVA to obtain a mortgage or finance to replace their car provided the IVA is progressing satisfactorily.

Conclusion

At Portland, we advise all debtors on the likely outcomes under bankruptcy and voluntary arrangement, and also the likelihood of acceptance of a proposal by creditors.

Each individual debtor needs to evaluate the advantages and disadvantages applied to their circumstances. For a debtor with no assets, living in rented accommodation who would not lose their job in the event of bankruptcy, then bankruptcy would be far less onerous than an IVA.

For a home owner with their own business or a job that they would lose in the event of bankruptcy then an IVA is usually the best solution.

If you are interested in proposing an IVA and would like a free evaluation without obligation, then click the button below, complete the form and e-mail to us.

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This document explains the relevant position only in general terms. We do not intend it to be used as formal advice about a specific situation, for which you should consult with a qualified insolvency practitioner and not rely upon this document. Portland would be pleased to advise you formally and you should contact one of the directors listed to arrange this. Portland regrets it is unable to accept any responsibility to anybody who seeks to rely on this document.