Individual voluntary arrangement

An individual voluntary arrangement (IVA) is an agreement made between a debtor and creditors, whereby the debtor pays part of or all their debts, over a specified period, as an alternative to bankruptcy. The implementation of the IVA is controlled by an insolvency practitioner acting as supervisor.

Compared to a bankruptcy an IVA is more advantageous for both the debtor and their creditors, because in an IVA:

• assets that are not usually included as bankruptcy assets could be included, for example the income from trading or employment of the debtor which might not continue if the debtor were to be made bankrupt and funds from third parties;
• the debtor has more say on how assets are dealt with, for example specific terms can be agreed with the creditors for the debtor to retain their home; and
• the restrictions applicable to a bankrupt are avoided.

By putting an IVA in place the debtor can get respite from constant enforcement actions for payment of unpaid debt. If not already an undischarged bankrupt, the debtor will stop running the risk of being declared bankrupt. If an undischarged bankrupt, the debtor may apply for the bankruptcy to be annulled. However, that protection will only be effective once the creditors have agreed to the IVA.

An IVA with an interim order

The debtor can get interim protection while setting up the proposal for an IVA by applying to court for an interim order. An IVA without an interim order is discussed later in this article.

What is the effect of an interim order?

While an interim order is in force:

• no creditor can present a bankruptcy petition in respect of the debtor;
• no landlord or other person to whom rent is payable may exercise any right of forfeiture by peaceable re-entry regarding premises let to the debtor, except if permission was obtained from the court; and
• no other legal proceedings against the debtor or execution or distress against the debtor's assets may be started or continued with, unless permission was obtained from the court.

Who can apply for an interim order?

If the debtor is an undischarged bankrupt they, the OR, or if there is one, the TIB can apply for the interim order. In all other cases the application will be made by the debtor.

When can application be made?

Application for the interim order can only be made if the debtor intends making a proposal for an IVA. If the debtor is an undischarged bankrupt, they need to give notice of their proposal to the OR and, if there is one, the TIB before the application for an interim order can be made. This notice must give the name and address of the nominee proposed for the IVA.

The application for an interim order must be accompanied by a witness statement that:

• gives the reasons for making the application;
• gives information of any legal process that has already commenced against the debtor or their assets;
• confirms that no application for an interim order was made regarding the debtor in the 12 months preceding the date of the witness statement; and
• confirms that the person named in the witness statement is willing to act as nominee and is qualified to act as an insolvency practitioner.

The application must be accompanied by the proposal and the nominee's consent to act.

The contents of the IVA proposal are prescribed and must for example:

• Identify the debtor
• Explain why the debtor thinks an IVA is desirable
• Explain why the creditors are expected to agree to an IVA
• Include detailed information on the debtor's assets, liabilities, nominee's fees, proposed duration of the IVA, conduct of existing businesses of the debtor, etc.

The proposal must be authenticated and dated by the debtor.

What is the effect of a pending application for an interim order?

While the application for an interim order is pending before the court, the debtor already gets some protection against the legal debt recovery actions of creditors, for example:

• No landlord or other person to whom rent is payable may exercise any right of forfeiture by peaceable re-entry regarding premises let to the debtor, except if permission was obtained from the court; and
• The court may forbid any distress on the debtor's assets or its subsequent sale and may stay any other legal proceedings against the debtor or their assets.

When can the court grant the interim order?

The court make an interim order if it is satisfied that:

• the debtor intends making a proposal for an IVA;
• on the day the application is made, the debtor is either an undischarged bankrupt or could have applied for their own bankruptcy;
• there had been no similar application in the preceding 12 months; and
• the nominee named in the proposal is willing to act in relation to the proposal.

If the above is shown and the court believes an interim order would assist in enabling the consideration and implementation of the debtor's proposal, an interim order may be made. An interim order is effective for a period of 14 days unless it is extended by the court.

What are the duties of the debtor?

To enable the nominee to prepare their report on the IVA proposal, the debtor must give the nominee:

• a document setting out the terms of the voluntary arrangement they want to propose to the creditors; and
• a statement of their affairs, made up to a date not earlier than 2 weeks before the date of the proposal, giving details of their assets, liabilities, creditors and such other particulars as the nominee asks for in writing.

What are the duties of the nominee?

The nominee must submit their report on the proposal for an IVA to the court at least 2 business days before the interim order ceases to have effect.

The nominee's report must say whether, in their opinion:

• the debtor's proposal has a reasonable chance of being approved by the creditors and implemented; and
• the debtor's creditors should consider the debtor's proposal.

If the court decides, after receiving the nominee's report, that the debtor's creditors should consider the debtor's proposal, it will extend the period for which the interim order has effect so that the debtor will remain protected until the creditors have had the chance to consider the proposals.

If the court decides that it would not be appropriate for the creditors to consider the debtor's proposal, it will discharge the interim order.

If the nominee reported to court that the creditors should consider the proposal, the nominee will take the steps required to get the creditors to decide whether they approve the proposed voluntary arrangement. The decision will be reached by way of a creditor's decision procedure. The nominee must give notice of the creditors' decision procedure to each creditor of whose claim and address the nominee is aware.

If an undischarged bankrupt, the debtor's creditors include all those who are 'bankruptcy debt' creditors as well as those that would have been bankruptcy debts creditors had the debtor's bankruptcy started on the date that notice of the creditors' decision procedure is given.

The creditors can approve the debtor's proposal as presented, with amendments or not at all. Amendments can only be made to the proposal if the debtor agrees to it.

An IVA without an interim order

If the debtor doesn't need the protection they could get from an interim order, while getting an IVA proposal considered by the creditors, they can proceed as discussed below.

What does the debtor need to do?

A debtor can make a proposal for an IVA if they're bankrupt or able to make an application for their own bankruptcy at the time of the proposal.

If an undischarged bankrupt, the debtor must give notice to the OR, and if there is one, the TIB that they intend making a proposal for an IVA.

The contents of the IVA proposal must contain certain information prescribed by law, for example, it must:

• Identify the debtor
• Explain why the debtor thinks an IVA is desirable
• Explain why the creditors are expected to agree to an IVA
• Include detailed information about the debtor's assets, liabilities, nominee's fees, proposed duration of the IVA, conduct of existing businesses if the debtor, etc.

The proposal must be authenticated and dated by the debtor.

The next step is for the debtor to give the following to the nominee named in their proposal:

• a document setting out the terms of the voluntary arrangement they want to propose to the creditors; and
• a statement of their affairs, made up to a date not earlier than 2 weeks before the date of the proposal, giving details of their assets, liabilities, creditors and such other particulars as the nominee asks for in writing.

The named nominee must be an insolvency practitioner (or another authorised person).

What are the duties of the nominee?

If the nominee believes that the debtor is an undischarged bankrupt or can apply for their own bankruptcy, the nominee must within 14 days from the date of receiving the proposal and statement of affairs from the debtor, prepare and submit to the debtor's creditors, a report setting out whether in their opinion:

• the debtor's proposal has a reasonable chance of being approved by the creditors and of being implemented; and
• the debtor's creditors should consider the proposal.

If the nominee reported to the creditors that they should consider the proposal, the nominee will take the steps required to get the creditors to decide whether they approve the proposed voluntary arrangement. The decision will be reached by way of a creditors' decision procedure. The nominee must give notice of the creditors' decision procedure to each creditor of whose claim and address the nominee is aware.

If an undischarged bankrupt, the debtor's creditors include all those who are bankruptcy debt creditors as well as those that would have been bankruptcy debt creditors had the debtor's bankruptcy started on the date that notice of the creditor's decision procedure is given.

The creditors can approve the debtor's proposal as presented, with amendments or not at all. Amendments can only be made to the proposal if the debtor agrees to it.

Contents of the notice of the creditors' decision procedure

The nominee's notice of the creditors' decision procedure must include certain contents prescribed by law, such as:

• Details to identify the proceedings
• Details of the court that the IVA application must be made to (where there is no interim order in place) or that the nominee's report of the debtor's proposal has been filed (where there is an interim order);
• A statement of how a creditor can propose amendments to the debtor's proposal and how the nominee intends to deal with those;
• A description of the decision procedure being used and all the required information to make it possible for the creditor to access the voting system and cast their vote
• A statement of the effects of the relevant provisions relating to creditors' voting rights, the calculation of creditors' voting rights and the required majority of creditors for making decisions
• A statement that a physical meeting to decide the matter will only be held if, within 5 business days from delivering the notice, 10% in value of the creditors or 10% in number of the creditors or 10 creditors request it

The nominee may also include a notice that the results of the consideration of the proposal will be made available for viewing and download on a website and that no other notice will be sent to the creditors that received notice of the creditors' decision procedure.

The notice must also include, unless it has previously been supplied to the creditors, a copy of the

• Proposal
• Statement of affairs or a summary listing the creditors and the amounts owed to them
• Nominee's report on the proposal

The notice must set the date for the decision to be made, no sooner than 14 days after delivery of the notice, and not more than 28 days after:

• the date that the nominee received the statement of affairs and proposal from the debtor (in the case where no interim order was made); or
• the date that the court considered the nominee's report on the proposal (where an interim order is in place).

The notice must be authenticated and dated by the nominee.

The creditors' decision procedure will be competent to act if the nominee gets one valid vote on or before the decision date.

Creditor's decision procedures

The nominee may use any of the following for the creditors' decision procedure:

• correspondence;
• electronic voting;
• virtual meeting; or
• any other decision-making procedure that gives all the creditors who are eligible to vote an equal chance to do so.

Creditors' decisions on the IVA proposal

The creditors may not approve the proposal with modifications unless the debtor consents to each change. The modifications may include the appointment of a different insolvency practitioner or another authorised person to act as supervisor to oversee the IVA's operation instead of the nominee.

The creditors can't approve any changes to the proposal that:

• would cause it to stop being a proposal for purposes of establishing an IVA;
• affects the rights of any secured creditor to enforce their security, unless that creditor agrees to it;
• would affect the priority of any preferential debts above those debts that aren't preferential, unless that preferential creditor agrees to it; or
• would negatively affect the proportion of debt recovery for any particular preferential debt compared to any other preferential debt, unless that preferential creditor agrees to it.

For the proposed IVA or a modification of the proposal to come into force 3-quarters by value of all the creditors that have responded must vote in favour of it. However, a decision is not made if more than half of the total value of the creditors who are not associates of the debtor vote against the proposed IVA.

The nominee must decide whether a creditor is entitled to vote by admitting or rejecting their claims in whole or in part. If the nominee is unsure whether a claim should be admitted or rejected, they will allow the creditor to vote, but they will mark it as objected to. These votes will be subject to later being declared invalid if the objection is sustained. However, every creditor that received notice from the nominee of the creditors' decision procedure for purposes of deciding on the proposed IVA will be entitled to vote.

Any creditor or the debtor can appeal the nominee's decision to the court within 28 days of the nominee giving notice of the result of the creditors' decision procedure to the creditors (where no interim order is in place) and to the court (where an interim order is in place). If on appeal the nominee's decision is reversed or varied the court may order another decision procedure to be initiated or it may make such order as it thinks just. In an IVA, however, the court may only make an order if it believes that the circumstances giving rise to the appeal result in unfair prejudice or material irregularity.

The value of a creditor's vote

If the creditor's claim against the debtor is for a liquidated amount, the value of a creditor's vote is calculated as follows:

• If the debtor is not an undischarged bankrupt and there is an interim order in place, the creditor's vote is valued at the amount of the debt owed to them at the date of the interim order.
• If the debtor is not an undischarged bankrupt but there is no interim order in place, the creditor's vote is valued at the amount of the debt owed to them at the decision date.
• If the debtor is an undischarged bankrupt the creditor's vote is valued at the amount of the debt owed to them on the date of the bankruptcy order.

If the creditor's claim against the debtor is for an unliquidated amount or an amount that has not been established, the value of a creditor's vote will be set at £1 unless the nominee agrees to put a higher value on it.

The effect of approval of an IVA

From the date of the IVA approval the following unsecured creditors of the debtor will be bound by the IVA:

• every creditor that was entitled to vote at the time the creditors decided to approve the proposal; or
• every creditor that would've been entitled to vote if they had notice of it.

Although a creditor that was entitled to vote but didn't have notice of it will be bound by the IVA, they can challenge the IVA.

A secured creditor's rights are however not affected by an IVA, although they can agree, to varying extent, to be bound by the IVA.

If the debtor is an undischarged bankrupt at the date the IVA is approved, they can, once the time allowed for challenging the IVA has lapsed and no such challenge is pending, apply to court to have the bankruptcy order annulled. If the debtor doesn't apply the OR can. If an interim order is still in place 28 days from the date of the notification of the outcome of the creditors' decision, it will automatically lapse at the expiry of the 28 days. If that lapsing interim order stayed a bankruptcy petition at the time it was granted, the petition will be deemed to be dismissed when the interim order lapses automatically.

Providers of certain essential services such as water, gas, electricity, communication services and IT supplies, are by law prohibited from requiring payment of outstanding charges, for services supplied to a business of that debtor prior to the date of the approval of an IVA, as a condition for the continued supply thereafter. Also, any insolvency related contractual term of an essential services supply agreement that enables the supplier to charge higher prices or terminate the contract will have no effect where an IVA is approved in respect of the debtor whose business is being supplied. This means that the essential services supplier will only be able to terminate the contract of supply if:

• the supervisor of the IVA agrees to the termination;
• the supervisor doesn't personally guarantee payment of the charges incurred after the date of the IVA;
• the court grants permission; or
• the post- IVA supply charges remain unpaid for more than 28 days after payment was due.

Notification of outcome of creditors' decision

After the conclusion of the creditors' decision procedure the nominee has to give notice of the outcome to the creditors and other prescribed persons and where an interim order is in place also to the court.

Challenges to decision procedure outcome

Any of the following people may challenge the validity of the IVA:

• The debtor
• Every creditor that was entitled to vote at the time the creditors decided to approve the proposal
• Every creditor that would've been entitled to vote if they had notice of it
• The nominee or supervisor
• The TIB or the OR if the debtor is an undischarged bankrupt

A challenge must be made within 28 days of the nominee giving notice of the result of the creditors' decision procedure to the creditors (where no interim order is in place) and to the court (where an interim order is in place).

The validity of the creditors' decision can only be challenged on the grounds that the IVA unfairly prejudices the interests of a creditor or that some material irregularity occurred at or in relation to the creditors' meeting that approved the IVA.

A creditor would be unfairly prejudiced if the effect of the IVA is to deprive them of a right of recovery of the outstanding debt due, without a fair compensation for that loss. Even if all creditors are affected in the same way, it doesn't necessarily mean that there is no unfair prejudice of a particular creditor. The issue will turn on the facts.

A material irregularity would occur if the particular action or omission complained of as irregular, materially impacted the way in which the creditors decided to vote. This includes not disclosing information that might have led creditors to vote in a different way. So, the material irregularity involves all actions pre-voting that might have influenced a particular creditor to vote in a particular way.

Breach of the IVA

If the debtor breaches the IVA the supervisor may petition for the bankruptcy of the debtor. The supervisor must prove to the court that the debtor has:

• not complied with their reasonable requests;
• submitted misleading information to support their IVA proposal; or
• failed to comply with the terms of the IVA.

Does the IVA affect the debtor's credit rating?

An IVA will affect the debtor's credit rating and make it harder for them to open bank accounts and apply for loans in the future. All IVA's are registered and are searchable in the:

• Individual Insolvency Register
• (NI) Individual Insolvency Register