An Individual Voluntary Arrangement (IVA) is a legally binding agreement that allows individuals struggling with unsecured debts to reach a settlement with their creditors. As an alternative to bankruptcy, it offers greater flexibility and can help individuals protect their assets while managing repayments.
Our Personal Insolvency Lawyers outline how IVAs work, the role of insolvency practitioners, and the key benefits and drawbacks.
What is an IVA?
What is an IVA?
An IVA is an agreement between the debtor and their unsecured creditors for a composition to satisfy their debts or a scheme of arrangement of their affairs. IVAs have traditionally provided a more popular alternative to bankruptcy. An IVA is essentially contractual in nature and allows a debtor to:
- Settle their outstanding debts by paying a percentage of the overall value of those debts to their creditors; or
- Come to an arrangement with their creditors over the payment of their debts, perhaps with the debtor's assets being held or controlled in a trust for the benefit of creditors as beneficiaries.
An IVA also provides grounds for the court to annul an undischarged bankrupt's bankruptcy order.
How does an IVA work?
An IVA is a flexible procedure which can be tailored to the debtor’s circumstances. It will usually require the debtor to make funds available out of their assets (an asset-based IVA), income (an income-based IVA) or both.
A third party, such as a family member or spouse, may also contribute to the funds available for the creditors (which would otherwise be unavailable if the debtor was made bankrupt).
In small consumer debt cases, the arrangement may simply involve monthly payments to the supervisor from the debtor's income. If approved by creditors holding 75% or more of the total value of the debts owed by a debtor, an IVA binds the debtor and all of their creditors to accept the terms of the IVA in settlement of their debts.
What is the insolvency practitioner’s role in the IVA process?
The role of the insolvency practitioner (IP) changes as an IVA progresses with five distinct phases.
Providing initial advice. When first approached by a debtor in financial difficulty, the IP acts as an advisor. The IP should outline the options available to the debtor, for example bankruptcy or a debt management plan, and what they consider to be the respective advantages and disadvantages.
Preparing for an IVA. When preparing for an IVA, the IP should ensure that the debtor understands their obligation to cooperate and the consequences of proceeding.
Proposal. When assisting with an IVA proposal, the IP should verify the debtor's financial position and be satisfied that the proposal is credible and has a reasonable prospect of being implemented in the form presented.
Nominee. If a debtor decides to proceed with the IVA, the consenting IP becomes the nominee (and may act as a trustee or otherwise for the purpose of supervising the implementation of the IVA). The IP has a duty to the court at this point and is obliged to tell the court whether they think the debtor's proposal is viable for consideration by creditors. The nominee's report should provide sufficient information to enable creditors to make informed decisions in relation to the IVA proposal and report accurately in a clear and useful manner. Any modifications to the proposal must be approved by creditors and have the debtor's consent.
Supervisor. If the IVA is approved, the IP becomes the supervisor and supervises the implementation of the IVA according to its terms. The IP now acts even-handedly between the creditors and the debtors. The supervisor must monitor progress and issue annual reports to the debtor, the creditors and the court.
What are the advantages of an IVA?
For a debtor, the advantages of an IVA are:
- It is an effective alternative to bankruptcy proceedings.
- It provides protection against aggressive creditors as it binds all creditors.
- It enables a sole trader or partnership to continue trading to generate income to be used for paying creditors.
- A flexible proposal is drawn up by the debtor to accommodate their personal circumstances.
- It avoids the stigma, restrictions and effects of bankruptcy, such as not being able to act as a director of a limited company or applying for personal credit. However, in practice, credit may prove more difficult to obtain once an IVA is in place.
For creditors, the advantages of an IVA are:
- The costs of administering an IVA are considerably lower than a bankruptcy estate.
- A potentially higher return, as a dividend.
- Tax and VAT bad debt relief may still be claimed.
What are the disadvantages of an IVA?
Most of the disadvantages associated with an IVA affect the debtor, including:
- The IVA is entered on the Individual Insolvency Register which is a public insolvency register accessible to everyone.
- Duration: where contributions from income are made, an IVA is generally expected to last for a much longer period than bankruptcy.
- Change of circumstances: if the debtor’s circumstances change and the creditors reject amended terms, the IVA is likely to fail. The debtor will still owe the creditors the full amount of what they owed at the start of the IVA (less whatever has been paid to them under the IVA).
- Expense: an IVA can be expensive and there are inherent risks to consider.
- Home at risk if IVA fails: if the debtor fails to comply with the terms of their IVA, their home and personal assets may still be at risk. On the failure of an IVA, the debtor may be made bankrupt on a petition presented by their supervisor or a creditor.
- Credit score: the debtor’s credit rating can be affected for up to seven years.
What effect does an IVA have on secured creditors?
The rights of secured creditors, such as mortgagees, cannot be affected without their consent and therefore such creditors usually remain outside the IVA.
Please note, however, a secured creditor may signal their intent to be bound by the terms of the debtor's IVA by valuing its security at nil and submitting a proof of debt, for voting and dividend purposes, as an ordinary unsecured creditor.
Does an IVA release a creditor’s security?
Whether an IVA that binds a secured creditor extinguishes that creditor's security rights depends on the terms of the particular IVA proposal. If the terms of the IVA anticipate the creditor's security continuing to subsist, the creditor may still have the right to enforce its security over the debtor's assets, despite being bound by the terms of the IVA.
Conclusion
An IVA can offer a practical and less severe alternative to bankruptcy, giving individuals the opportunity to repay their debts in a structured and manageable way while
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Vicky Biggs
Legal Director
Vicky is a Legal Director in the Insolvency and Restructuring team at Myerson and has been with the firm since 2012. Utilising her commercial litigation experience, Vicky now specialises in contentious insolvency matters, advising insolvency practitioners, directors and individuals in relation to both corporate and personal insolvency issues.
Vicky advises on a wide range of insolvency matters, including claims made by administrators, liquidators and trustees in bankruptcy, director disqualification proceedings, remuneration approval applications, retention of title claims, validation orders, bankruptcy annulment applications and winding-up and bankruptcy petitions.
About Vicky Biggs