Introduction

Be very wary of insolvency practitioners and debt counselors charging up front fees in order to prepare an IVA. Please note however, that with The UK Insolvency Helpline the fees that IVA team charge are always paid out of the proceeds paid by the debtor into the arrangement.

Be wary of any IVA firms asking you to to settle the costs of the court application and the postage and stationery costs involved in circulating creditors. This is another way of charging up front costs. Nowadays an Interim Order is not always necessary. Even so some IVA say it is necessary.

The UK Insolvency Helpline work on a very strict “no up front fee basis”.

This means when the IVA starts all the costs of preparing the IVA get paid  out of the monthly contributions that are already going in to the IVA by the debtor.

This method is unique  and can only be done due to the nature of The UK Insolvency Helpline and generally means that the creditors are paying for the IVA and do not object to proposals that show that reasonable fee are coming out of the money going into the arrangement.

IVA Fees

The main reason why IVAs are so popular with both creditors and debtors is that the fees tend to be less than the court costs and Official Receiver fees involved in a bankruptcy.

The costs of setting up and running an IVA are paid by two lots of fees:

1. Nominees’ fee
2. Supervisors’ fees

To prepare an IVA there is a lot of work to be carried out such as :

1. Preparing the IVA proposal
2. Gathering all the information required
3. Preparing and filing the Nominee's report
4. Sending the proposal to the creditors
5. Holding a creditors' meeting.

Please note that The UK Insolvency Helpline IVA teams carry out a great deal of work to set and run the IVA over its term.

An IVA is a procedure whereby a scheme of arrangement, usually involving delayed or reduced payments of debts, is put forward to creditors. Such a scheme requires the approval of the court, and is under the control of a supervisor. The costs of administering an IVA are considerably lower than in bankruptcy, enabling a higher return to creditors.

Prior to the Insolvency Act 1985 and the introduction of voluntary arrangements an individual who was unable to pay his creditors might attempt to ignore the situation and hope that no creditor raised a petition for his bankruptcy. Other than taking matters into his own hands and filing for his own bankruptcy the only course of action open to a debtor was contained in the Deeds of Arrangement Act 1914. This allowed a debtor to come to an arrangement with his creditors based on reduced or delayed debt repayments but did not prevent a dissenting creditor petitioning for the debtor's bankruptcy. As a result, such arrangements came to be used less and less frequently. The provisions relating to the more effective and legally binding system of individual voluntary arrangements are now to be found in the Insolvency Act 1986.

In outline, the procedure enables an individual to seek the protection of an interim order if he intends to put a proposal for an arrangement to his creditors. The interim order allows time for the proposal to be considered by an insolvency practitioner and then placed before the creditors for their approval at a meeting.

Interim order

If a debtor wishes to proceed with a proposal to creditors, application is made to the court for an interim order. The application may be made by the debtor or, if the debtor is an undischarged bankrupt, either by the debtor, the trustee of his estate or the Official Receiver. The purpose of the interim order is to protect the debtor's property while the proposal is being considered. During the period after the application is submitted the court may stay any legal processes against the debtor, and if the debtor is an undischarged bankrupt, an interim order may contain provisions relating to the conduct of the bankruptcy.

The court will grant an interim order only if it is satisfied that the debtor intends to submit a proposal to his creditors and that on the day of making the application, he was an undischarged bankrupt or was in a position to petition for his own bankruptcy. An order will not be granted if the debtor has made a similar application within the previous 12 months. It is not necessary at this stage for the proposal to be set out in detail but in many cases the proposal is prepared before the application for the interim order is made.

Once an interim order has been granted, the debtor is protected from bankruptcy petitions and unless the court gives leave, no other legal action may be commenced or continued against the debtor. Unless the nominee or the debtor applies for an extension to the interim order, the order expires after 14 days.

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The proposal

The debtor must prepare a proposal explaining why such an arrangement is desirable and why the creditors may be expected to agree to it. The proposal is submitted to a "nominee", who must be an insolvency practitioner, for his consideration and comments. In practice, the nominee will have assisted in preparing the proposal. The proposal must contain details of the assets to be included (or excluded) and any assets to be provided by others.

Details must also be given of the nature and amount of the debtor's liabilities (noting those guaranteed by others), the extent to which there may be claims from secured, preferential or associated creditors and the manner in which claims are proposed to be dealt with. The proposal must also state whether in the event of bankruptcy, there could be claims relating to transactions at an undervalue, preferences or extortionate credit transactions.

The proposal must include a timetable setting out the proposed duration of the voluntary arrangement, when creditors may expect a distribution and how much they may expect to receive. Estimates of the remuneration and expenses of the nominee and the supervisor must also be disclosed together with details of the supervisor's role and qualifications. (Once a voluntary arrangement is approved the person carrying out the function of the nominee becomes known as the supervisor.) In addition to the information required to be disclosed by the insolvency rules the proposal should also include a brief explanation of the background to the debtor's predicament and his plans, if any, for the future. The proposal should be realistic, informative and achievable. After the interim order is made
The nominee must submit a report to the court not less than two days before the interim order expires based on information provided by the debtor. The report is placed on the court file and may be inspected at any time by any creditor. The nominee must state whether, in his opinion, a meeting of the creditors should be called to consider the proposal and, if so, the date, time and place of such a meeting. If the court is satisfied that a meeting should be held, the period of the interim order will be extended accordingly but the meeting must take place between 14 and 28 days after the nominee submits his report. Notice must be sent to all known creditors at least 14 days before the meeting, accompanied by copies of the proposal and a statement of affairs (including a list of creditors), the nominee's comments on the proposal and a proxy form. Notice of the meeting does not have to be advertised.

Creditors' meeting

The creditors' meeting to approve the proposal must be held at a convenient venue for the creditors between 10 am and 4 pm on a business day and must be chaired by the nominee or his substitute (who must be suitably experienced). Creditors are entitled to vote provided written notice of their claim has been submitted to the chairman either before or at the meeting.

There is no requirement for proxy forms to be submitted prior to the meeting - they may be taken by the proxyholder to the meeting. Votes are calculated according to the amount of a creditor's debt but votes of secured creditors are calculated on the unsecured part of their debts only. At the meeting, a resolution to approve or modify the proposal requires a majority in excess of three quarters in value of the creditors present (in person or by proxy) and voting.

Other resolutions may be passed by a simple majority. However, a resolution will be invalid if those who vote against it include over half in value of the independent creditors, i.e. creditors who have no connection with the debtor. The meeting may be adjourned (as many times as may be required) until the proposal is either accepted or rejected but no adjourned meeting may be held more than 14 days after the original meeting. The meeting may approve the proposal as presented, or may approve it with modifications (as agreed by the debtor).

Once the creditors at the meeting approve the arrangement every person who had notice of and was entitled to vote at the meeting, whether or not he actually did so, is bound by the agreement. The meeting cannot, however, affect the rights of secured or preferential creditors without their consent. The chairman must prepare a report on the meeting and file a copy with the court. He must also inform all those who were sent notice of the meeting whether or not the proposal was accepted, and if so whether it was modified.

If the proposal is approved, the chairman must lodge details of the arrangement with the Secretary of State for inclusion in a register available for public inspection. Challenge of decisions Within 28 days of the report on the creditors' meeting being filed with the court an application challenging the decision may be made either by the debtor, a person entitled to vote at the meeting, the nominee or any person who has replaced him, or the trustee of the estate or the Official Receiver if the debtor is an undischarged bankrupt. The challenge may be made on the grounds that the arrangement approved at the meeting unfairly prejudices the interest of a creditor or that there has been some material irregularity at, or in relation to, the meeting. If the court upholds the challenge it may give instructions that a further meeting should be held to consider a revised proposal or that the meeting be reconvened to hear the original proposal again.

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Supervisor

The supervisor takes charge of the assets included in the voluntary arrangement and is required to keep accounts and records of his transactions during the term of the arrangement. At a maximum of 12-monthly intervals, the supervisor must prepare a summary of receipts and payments which must be sent, within two months, to the court, the debtor and those creditors bound by the arrangement.

In addition to this summary the supervisor must include a report commenting on the progress made. The supervisor acts under the supervision of the court and may apply to the court for direction on any matter relating to the voluntary arrangement. Completion of the voluntary arrangement.

Once the arrangement has been completed, the supervisor reports on the implementation of the arrangement and any variation from the proposal must be explained. The report must also summarise the receipts and payments made by the supervisor. Some questions answered.

Should a creditor accept the debtor's proposal?

Although the Act provides an insolvent individual with the framework necessary to come to an arrangement with his creditors there has been a tendency for some debtors to propose a voluntary arrangement merely to avoid the stigma of bankruptcy. Upon receiving notice of such a proposal the creditor should consider the matter very carefully, attend the meeting and question both the debtor and the nominee thoroughly.

If the proposal appears to be genuine and have a reasonable chance of success, particularly if the return to creditors is likely to be better than in bankruptcy, a creditor should tend to be in favour. If, however, it is clear that the proposal is ill-founded and has very little chance of success, a creditor should oppose the arrangement and petition for bankruptcy In practice, voluntary arrangements sometimes fail to gain the necessary support because certain creditors believe there may have been fraud or other such irregularities and that the supervisor is powerless to investigate.

What should a creditor ask about the nominee and supervisor?

In assessing the merits of a proposed voluntary arrangement a creditor should have regard to the professional standing of the nominee and the extent to which the proposal outlines the duties and responsibilities of the supervisor.

A creditor should be concerned that the arrangement provides the supervisor with sufficient authority to take appropriate action if the debtor fails to fulfil his obligations. Experience has shown that there can be difficulties in ensuring that debtors comply with the terms of the arrangement.

Should creditors form a committee?

The Act does not provide for the formation of a creditors' committee in relation to an individual voluntary arrangement. As creditors' committees are widely used in other situations (in liquidations, administrations and receiverships) to sanction procedures and monitor progress, the creditors considering a proposed voluntary arrangement may wish to establish their own informal committee. Such a committee, however, will have little authority unless agreement can be reached between all parties as to its powers, duties and responsibilities.

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Why and when do voluntary arrangements fail?

Even though a voluntary arrangement receives the necessary creditors' approval it may still fail due to the debtor losing interest in the scheme or refusing to co-operate further. However, defining failure may not always be straightforward.

Relatively few voluntary arrangements have been tested in the courts to determine whether they fail as a result of, say, a debtor paying an interim distribution of only 15% compared to an original proposal of 20%. The possibility of such a variation from the proposal should be considered at the creditors' meeting and the proposal modified, if necessary, to provide the supervisor with suitable powers.

Does a voluntary arrangement protect a debtor from future bankruptcy petitions?

Although creditors may agree to a voluntary arrangement, the debtor is not protected from future bankruptcy petitions. If the debtor fails to abide by the requirements of the arrangement the supervisor or the creditors may petition the court for a bankruptcy order. In addition the debtor may incur further credit after the implementation of the arrangement. New creditors are not parties to the voluntary arrangement and are therefore entitled to petition for the debtor's bankruptcy.

There are plenty of debt advisers around. You should talk to us because we advice on all aspects of insolvency and can offer solutions that are more likely to secure creditor approval.

You will appreciate that your creditors will want, and are entitled, to receive as much as you can afford. The IVA will offer the creditors a monthly amount, to be paid back for a finite number of years. This monthly payment is determined by the amount you can afford rather than the amount that you owe because the proposal is based on your income and expenditure. The payment period is normally for five years. Only in special circumstances is it less than five years, and rarely more.

This solution, therefore offers them a settlement which would be far more beneficial to them than making you bankrupt. They also know that, because it is legally binding, they are guaranteed to receive the agreed amount.

You, too, benefit because you pay back only a proportion of your debt and you know in advance exactly how much you will pay and for how long.

At the end of the IVA period, it is deemed that you have made a 'full and final settlement of your debts' which sets you back on the road of life with a clean sheet. Any negative credit ratings you may have can then be removed.

• In most cases, your total debt repayable will be greatly reduced with the balance being written off by your creditors.
• Your repayments will be for a finite period of time (normally five years).
• You will know in advance of formalizing the arrangement exactly how much you will pay each month.
• All interest charges are cancelled, so the spiral of debt is immediately halted.
• All legal action is frozen and all demands, letters and telephone calls from your creditors will cease.

Repayments are simplified by a single monthly payment regardless of how many creditors you have. You can even pay by direct debit if you wish.

If you wish to discuss the Individual Voluntary Arrangement (IVA) procedure and understand how it can help you please complete the following form or telephone freephone 0800 074 6918.

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