A Guide to Individual Voluntary Arrangements

The best way to think of an individual voluntary arrangement (IVA) is as a deal between the debtor (the person who owes the money) and the creditors; the people or businesses to whom the money is owed.

Where the debtor cannot pay off his or her debts on time or they are insolvent (for a definition of insolvency click the insolvent? guide) or if your business is under huge pressure and you cannot deal with the creditors satisfactorily, than an IVA can often be a good solution.

Making a payment on a regular periodic basis the debtor can bring together all of his or her debt problems (except where the creditor has security such as a mortgage over property) and get on with their business and their lives.

Who should use an IVA?

It is imperative that the IVA is used where a sole trader’s business is viable or where the debtor has disposable assets that can be turned readily into money in the short to medium term. Using the IVA can allowed time to sell such assets for better value than a bankruptcy trustee can obtain.

If the business isn't viable it should be closed as soon as possible and bankruptcy initiated. Occasionally where the business is closed, a deal between the person and the creditors can be reached but this would usually mean disposal and liquidation of assets.

IVA's a guide

See IVA's a flowchart for easy-to-follow pictorial view of the IVA process.

Debtors who run small or not so small businesses as a sole trader or as a partner in a partnership (see www.partnership-rescue.com for fuller details of you’re a partner in a partnership) can often find themselves in a position where the business is struggling financially.

Most small businesses in the UK suffer from being undercapitalised at some stage. It may be that you did not have enough money to start a business off, that the bank or other financial providers are unable to fund you to the level you needed; or that you have had bad debts: failed contracts or simply have not managed to get the business to a level of making profits yet.

The debtor is usually under extreme cashflow pressure and cannot manage the problem. Business is suffering because the debtor is firefighting and not concentrating on running the business. This can become all-consuming. Dealing with irate creditors is also a very tiring and lonely process. This can often lead to a downward spiral towards the closure of the business and bankruptcy of the individual.

If you're in this position you should follow this guide, IVA's FAQ’s and IVA’s flowchart and also compare the other options. Prior to doing this, it is best to look at your objectives pages, do's and don'ts and your options before deciding which is the most appropriate.

After that if you have decided that the IVA is the most appropriate route, make a list of all of your creditors. Don't make the mistake of saying a creditor isn't due for payment now, include all current and future debts.

For example, we often meet sole traders who have habit of "compartmentalising" their debts. An example is, they know the VAT isn't due until the end of the month after this and therefore they don't see it as a liability. It IS a liability now and one should estimate to an appropriate point in time (say the end of the current month) how much is due to every creditor.

It is possible to estimate these debts because sometimes its impossible to make detailed and exhaustively accurate lists. The law allows for an estimated statement of your debt to be used as the basis for preparing a proposal to deal with that problem.

Then make a list of all of your assets. Put reasonable values on them and if you cannot ascertain values for assets estimate – try getting an idea from similar assets or priced assets. (Use the internet to get car valuations etc). The law doesn't envisage you going out get professional valuations for every asset because this would be too time-consuming and costly.

Perhaps the most important process to go through is to look dispassionately at the business and decide whether it is viable. See 99 marketing questions. Decide whether there is enough activity for your business to be profitable with its current overheads or if it were to be restructured.

Often it can be just down to removing a couple of problem areas which if resolved could lead to the business being viable. If however the business has never made profit, sales are not rising to the level where overheads start and known prospects aren’t great then an IVA is not suitable.

Now that you have established the true position the business' debtors, creditors and its viability you should consider the IVA process. If you wish to discuss your information contact us or any local insolvency or turnaround practitioner. We will talk you through the issues of viability, determination and ability to structure a deal free of charge. Call now.

Once a decision is taken to go ahead you will need to appoint an advisor and or a nominee. An advisor would assist you in building the proposal, collating all the necessary information and dealing with all of the aggressive and passive creditors. The advisor may also seek to discuss the position with your bank and secured lenders, the Inland Revenue and VAT Office. At some stage however a nominee is necessary. A nominee is a short name for the nominated supervisor - this is a licensed insolvency practitioner for licensed by the DTI and is usually a chartered accountant in this country.

The nominee's job is to review the proposals of the debtor produced either by the debtor himself or by the advisor in conjunction with the debtor. If he can satisfy itself that the proposals maximise creditors interests, are achievable and almost he or she will put their name to the proposal and sponsor it to the court and to the creditors. It is important to remember that the proposal will be your proposal and that you have to swear an affidavit saying that is true incorrect to the best of your ability.

Writing the proposal

The law envisages that the debtor will write the proposal and then ask an IP to act for him or her. Of course the legal process is complicated and you have a business to run. Therefore it is probably best to use experienced, pragmatic and respected Turnaround practitioners or insolvency advisors to help you write the proposal. Regardless of whom you use the following points should be remembered:

1. Base it on sensible cashflows, sales and costs. Don't guess don't expect large increases in sales.
2. Expect that things in the first year will be a difficult and that sales mean indeed fall.
3. As a result expect to suffer in the first year and do not promise to make large payments in the first year the maximum amount in we would usually allow most debtors to repay in the first year is £12,000 or less.
4. Don't promise too much but as above make sure it repayments are affordable.

IVA Proposal contents

The proposal should include a current description of why the business has failed and why it is insolvent. It should also detail what the structure of the deal is and how the creditors are going to be repaid. To help the creditors decide whether to accept the IVA it must contain what is called a statement of affairs. Or SOFA for short. A SOFA paints a picture of your financial position and demonstrates that you are insolvent. It will also show what would happen if you went into bankruptcy and what the outcome would be if the IVA were approved and successful.

The document will describe how long the deal is for. Typically most IVA's last between three and five years. And the document will describe how much the debtor will pay from the business in the months and years ahead to his/her creditors.

After the document has been completed and the affidavit sworn it can be filed at court. The purposes of this are to ensure that the document that is filed at court is the same that is circulated to all creditors and to apply for a moratorium (called an interim order) to protect the debtor in the period between the application to court and the date of the creditors meeting.

Once this process has been completed a creditors meeting is called a please see diagram below for a quicker understanding of the mechanism and the timing.

There are two methods of applying for an interim order to protect the debtor.

The first is to apply or make an application for an interim order prior to the proposal being completed. The second is to use a method called a concertina application this just means that the application for the interim order and a proposal filing happens at same time. This is often the most efficient and cost-effective method.

The interim order: a description.

As described above if the pressure is intense on the debtor it is possible to obtain protection from the court or an "interim order". This protection means that creditors may not petition for your bankruptcy without the permission from court. All actions by bailiffs or Sheriffs are stayed (which means frozen) until such time as a creditors meeting can be held. For further details and discussion on the legal actions discussed above please see our legal actions guide.

Creditors meetings and voting

After the proposal has been filed and posted to every known creditor, a creditor’s meeting is called. As seen above, there is a statutory minimum period of 14 days before this creditors meeting can be held from the date of the receipt of the document by the creditors. This is to allow adequate time for them to consider the documents contents and to make objections or modifications.

At a creditor’s meeting the creditors can question the proposal, the debtor and the chairman, who is typically the nominee, about the contents of the proposal. It is also possible for them to modify the proposal as they see fit. Provided that a majority of 75% of the creditors agree with the modifications these can be adopted into the document and become part of the proposal going forward.

Modifications typically include ensuring that the debtor repays the amount agreed but also pays all future debts on time such as the tax due and VAT. Where a creditor makes a modification that is onerous or would not be in the interest of the debtors or the other creditors it would be rejected by the chairman unless sufficient majority are in favour of this. Ultimately the debtor can decide not to go ahead with the IVA, but to use bankruptcy. This is rare but is possible.

Voting at creditors meetings

Voting is an area that raises lots of concerns and questions from debtors to ourselves and one which is often confused and confusing.

Put simply provided a majority of creditors over three-quarters supports the proposal as discussed, proposed and modified then the proposal is accepted.

All the debt of the creditors is added up and each creditor has a vote according to the amount of money he or she is due by or from the debtor. Please see the example below:

Example of Voting at an IVA Creditors Meeting

As in the example above 94.80% of the creditors, at the meeting, voted in favour and 5.2% of the creditors, at the meeting, voted against. However only 59% of the total creditors voted. This vote is sufficient to bind all creditors legally

"Being bound" means that the creditor may not take legal action to recover the debts due to the creditor: whether they supported the proposal or not. However, and this is important, all future debts must be paid to normal terms.

Supervisors – voting upon. It is possible for the creditors to replace the nominated supervisor with another insolvency practitioner. Again this is rare but does happen on occasion. Therefore typically the nominee will want his fees paid before this creditors meeting!

After the meeting?

After the voting has been concluded the chairman will typically close the meeting by saying that the proposal has been agreed and that all creditors will be circulated any modifications and a chairman's report. This document is filed at court and the interim order is removed usually within a week or two of the creditors meeting.

Assuming that the supervisor is appointed by the creditors:

His or her job is to act us a person who supervises the deal between the creditors and debtors. Provided the debtor is making a monthly or quarterly or periodic payments as agreed and all information requested by the supervisor is provided then he or she will take no further action. Their job consists of reporting the information to the creditors over the period of the IVA and also making payments in order of priority.

The deal will propose that a certain amount of money is paid into a trust account held by the supervisor over a period of time to be agreed. If for example you agree to pay £5,000 a year for the next five years, £25,000 will be paid in.

At the end of each year, payments will be made to the creditors who have proved their debts to his/her satisfaction and in order of priority. To understand the order of priority see creditors ladder guide.

Advantages of the IVA mechanism

It crystallises the position. This is often one of the most important benefits, a debtor is often reaching the end of his or her tether because they have tried to do deals, they may have raised refinancing monies or tried to trade out of the situation for so long that they are becoming very frustrated.

If they can determine the business is viable, then the IVA draws a line in the sand. Once the interim order, as described above, is in place he or she can get on with insuring that the business recovers whilst the document is circulated to creditors and at the end of that agreed period a creditors meeting held.

It allows focus on the business. Rather than trying to constantly do deals to ensure that creditors don't take action against the business, the debtor is entirely focused on recovering the business.

It is a quick process and time determined. As above the certainty that a creditors meeting will be held on a certain day three or four or five weeks hence means that the world can start again once this has successfully concluded.

Modest cost. It is impossible to say how much an IVA would cost but anywhere between £500 and £10,000 is a typical amount for an IVA for a sole trader business. It is of course possible for such a business to be quite complicated and costs may increase as a result. It is usually determined by the time involved by the advisors be they a turnaround practitioner or insolvency practitioners.

It is discrete. The IVA mechanism is not advertised and, as such, is not public knowledge. Of course your creditors will know because they are circulated a document and have the right to vote upon it. It is also, in our opinion, important to make sure your principal trade partners are aware. This means your best customers should be aware that you have done a controlled restructuring. Please take further advice from us on this point by calling our freephone number if necessary.

Debt reduction is possible. One single monthly payment repays the creditors the agreed amount over an agreed period of time. This should be based on profitability and the ability of the debtor to repay comfortably.

We also recommend the use of a profits ratchet. This means that if the basic minimum payments are achieved and the company or business is much more profitable than originally forecast, the additional repayments can be made to the creditors in an agreed fashion.

This "jam tomorrow" approach is popular with creditors because they see that that structure of repayment is plausible and you're not seeking to make promises you cannot keep. Likewise you are not going to not pay the creditors should you do a lot better in your business in future.

In summary the debtor will repay what is affordable in say 5 years. This may be less than all of the debt. See IVA FAQ’s for fuller discussion of this.

Disadvantages of the IVA mechanism.

Obtaining future credit is difficult. It has probably been difficult to obtain credit prior to the IVA anyway. But, it is important to understand that future trade credit or other credit for personal means is very difficult to come by, but not impossible.

Fees. Using insolvency and turnaround practitioners costs money! However in comparison with the costs of bankruptcy it is often more cost-effective, but there is a cost and it has to be found at a time when money isn't flowing freely.

There is some publicity. As mentioned in advantages your creditors will know and it may be many of your customers will find out. This can be managed successfully if a proactive plan is agreed with your advisors.

It is tough?! As mentioned several times in this description it is vital that the debtor is determined to succeed. There will be many pitfalls and difficulties along the way and three to five years, which is the average length of time for an IVA, is a very long time indeed. Do question yourself dispassionately - are you ready to fight for this business?

Change is essential. We have lost track of the number of sole traders who have committed themselves to an IVA and promised everybody, including themselves and their advisors, that they would change to accommodate the structure of the IVA and the needs of their business to ensure its success. Many simply return to the age-old ways of not running the business professionally. This will lead to inevitable failure of your business and yourself.

If you have any further questions please see our IVA FAQ’s and the IVA flowchart.

If you'd like to understand even more about the IVA mechanism please see our very brief case studies page.

Remember don't bury the problem: call us now on 0800 9700539 or e-mail us at info@partnership-rescue.com for assistance.