A guide to the Individual Voluntary Arrangement (IVA) for partners
An individual voluntary arrangement is a formal deal between the individual (debtor) and his or her creditors. If the individual is in debt and can’t pay payments when they fall due, he or she is insolvent. An IVA can protect debtors against legal actions while a suitable repayment plan is put in place. See the three tests for insolvency here.
An IVA can also help if the business is struggling with cashflow and creditors cannot be paid on time. Having an opportunity to pay back debt in a realistic time-frame lets the individual concentrate on running the business and is infinitely better than bankruptcy
When can an IVA be used?
If the individual’s business is a sole tradership or partnership and it is viable, an IVA is the best option for the business to continue. If there are any disposable assets, these can be sold (often at a better value) in an IVA to cover debt that is owed.
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 individual and the creditors can be reached but this would usually mean disposal and liquidation of assets.
A guide to IVAs
When running a small business, partners can often struggle financially for a number of reasons. The business could be under capitalised or it may be difficult to get suitable finance. If large contracts are lost, this can be put immense pressure on cashflow.
Once things start to get out of control, it can be a lot harder to manage and run the business because there is so much ‘firefighting’ to do. By this, we mean time spent dealing with creditors and resolving problems rather than concentrating on strategies and improving profits. This can often lead to further problems putting the business at risk of closing. In the event of insolvency, partners can be made personally liable for the partnership’s debt. This can lead to bankruptcy of the individuals involved.
As mentioned above, an IVA is a deal between the individual in debt and the creditor and usually lasts between three and five years. The arrangement can protect the debtor against legal actions and allow him or her to pay back debt from future profits.
Advantages of the IVA mechanism
- It crystallises the position. This is often one of the most important benefits as a debtor is often reaching the end of his or her tether. He or she will have tried to do deals, raise refinancing monies or tried to trade out of the situation for so long that he or she is becoming very frustrated.
- If the business is viable, then the IVA draws a line in the sand. Once the interim order, as described below, 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. Without knowing the number of issues to deal with it is impossible to say how much an IVA would cost but anywhere between £3-10,000 is a typical amount for an IVA for a partner in 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 by email, and have the right to vote upon the IVA proposal. 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 BEFORE calling the meeting of creditors.
- 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.
In summary, the debtor will repay what is affordable in say 5 years - this may be less than all of the debt.
Disadvantages of the IVA mechanism
- Obtaining future credit is difficult. It has probably been difficult to obtain credit prior to the IVA anyway. 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! It is vital that the debtor is determined to succeed. There will be many pitfalls and difficulties along the way. 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 and partnerships who have committed themselves to an IVA or joint IVAs 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 FAQs and the IVA flowchart.
The IVA process
If you would like to go into an IVA, the first thing you should do is put together a list of all of your creditors, both current and future ones.
You then need to make a list of all your assets and their values. If you aren’t sure how much they are worth, give estimates by comparing similar assets or goods online or in brochures etc. Don’t worry too much about getting professional valuations.
It’s vital you review all aspects of the business to see whether it is viable going forward. Our marketing guide may help you with this. Would you consider a restructure and is there enough business to be profitable?
If problems can be resolved and there is a chance for the business to be viable, an IVA is worth considering. If you would like more information about IVAs, you can contact us on 0800 9700539. We can discuss all of the above referring to your specific situation, free of charge.
If the IVA is to go ahead, you will need to appoint a nominee (usually a licensed insolvency practitioner) to handle your case. An advisor can help prepare a proposal, deal with creditors and assist you with collecting all the information you need to go forward, however you will need a nominee too as legalities require a licensed insolvency practitioner to represent a case.
The nominee will review proposals and ensure creditors’ interests are maximised before putting it to the court and creditors.
The IVA proposal
It’s best to seek insolvency advice when writing the proposal as the legal process is often complicated - turnaround practitioners can prepare the proposal on your behalf if they have all the right information.
It’s then the insolvency practitioner’s job to put forward the proposal at court. Whether you write the proposal yourself or have outside help, it’s important to include realistic costs and cashflow figures without estimating large increases or future profits. Also, remember you are not out of the woods just yet and the next year will probably be tough.
Ensure you don’t commit to making large payments, we usually do not recommend you pay out more than £12,000 in the first year. Repayments must of course, be affordable.
What is included?
In the proposal, there should be details of the current financial situation and how the business became insolvent, known as a statement of affairs (SOFA). This statement should also include the outcomes of an IVA if it was successful. There should also be an outline of the arrangement’s structure, with information showing how creditors will be repaid and how much they will receive over the number of years.
The proposal and SOFA will then be filed at court, allowing a formal interim order to be applied. This will protect the individual from the time the proposal is filed to the day of the creditor’s meeting. Essentially, it means creditors cannot issue any legal action, like bankruptcy, without getting permission from the court. All actions by bailiffs or sheriffs are stayed (frozen).
Applying for an interim order
There are two methods: 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, which means the application for the interim order and the filing of the proposal takes place at same time. This is often the most efficient and cost-effective method.
The Creditors meeting (General Guide)
Once the proposal is sent to every creditor, a creditors meeting will be called. The meeting can only be held from 14 days after the proposal has been received by creditors (date of the receipt). This gives creditors time to make amendments and put forward any objections.
Nowadays there is generally no actual creditors meeting it is usually deemed consent or a virtual (telephone) meeting. Before or at the virtual meeting, 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 and his partners IVA 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 a creditors meeting
Voting is an area that raises lots of concerns and questions from debtors to ourselves and one which is often confusing. Usually creditors send their votes to the IVA nominee in advance of the decision making process (creditors meeting).
Put simply, provided a majority of creditors over three-quarters votes to support 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
Total PAYE debt
Total VAT debt
Total Unsecured Creditors
Total Debt in IVA proposal
Present at Creditors Meeting
Total votes cast
Total %age in Favour
Total %age Rejecting
As shown in the example, over 94.8% of the creditors voted in favour and 5.2% of the creditors 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.
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!
What happens after the Creditors meeting?
After the voting has concluded, the chairman will typically close the meeting by saying that the proposal has been agreed and that all creditors will be sent 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 supervise the deal between the creditors and debtors. Provided the debtor is making monthly, 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.
If you're interested in the IVA route, call us on 08009700539 for initial free advice and one of our corporate advisors can talk through the process.
Worried about poor cashflow? Covid-19?, How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.