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Individual Voluntary Arrangement For Partners

28th June, 2019
Categories:
Keith Steven

Written ByKeith Steven

Managing Director


07879 555349

He has rescued hundreds of companies and helped many of them turn around using CVA or pre pack. Could he help YOUR company?! Call him now 07833 240747

Keith Steven

Table of Contents

  • A guide to the Individual Voluntary Arrangement (IVA) for partners
  • Example of Voting at an IVA Creditors Meeting
  • What happens after the Creditors meeting?

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

View our IVA flowchart for a step-by-step guide to the process.

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£5,000.00
Total VAT debt£2,000.00
Total Unsecured Creditors£37,800.00
Total Debt in IVA proposal£44,800.00
Present at Creditors Meeting
PAYE£5,000.00
VAT£2,000.00
Unsecured creditors£19,500.00
Total votes cast£26,500.00
In Favour£25,123.00
Reject£1,377.00
Total %age in Favour94.80%
Total %age Rejecting5.20%
Proposal accepted

Yes

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.

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Notice of Intention To Appoint Administrators

A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.

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What Does Going Into Administration Mean?

Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners.  The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. Company rescue as a going concern – this is usually a  company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation.  This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required.  Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk.  So communication with the secured lender is essential.  

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What is Receivership?

in What is …? What is receivership?

Understanding Receivership: Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control.  When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership. These questions and answers will give more detailed background to the Administrative Receivership technique. If you have any further general or specific questions email us or complete the contact form. Q: How does it happen? A: Receivership can happen very quickly once the bank loses faith in the directors. The best policy is to work with the bank and produce a survival plan having taken professional and expert advice. Q: But the bank can't just appoint a receiver can they? A: Yes - read the terms of the debenture closely - you will be surprised how little power you have to prevent it. In truth the bank will generally have exhausted all possible avenues to help to try to preserve the business. If the directors are manifestly not up to the job or will not listen, will not take professional advice, they will lose patience quickly. Q: Can we stop them? A: Not normally. However if you talk to an experienced turnaround practitioner they can often persuade the bank that their involvement will lead to a review of viability followed by a professional recovery plan and the bank will usually give time for this to happen (within strict financial constraints) Q: How can we avoid receivership? A: Follow the guidance on this site. Discuss the problems with your key people. What caused them and how you can get round them. Build a plan for survival. Discuss this clearly with the bank. If in doubt about the correct route speak to a turnaround practitioner or a quality insolvency practitioner who lists rescue and recovery as a specialty. Be warned most are still looking for liquidations and receiverships (undertakers)If the bank wants to put investigating accountants in; wait until you have a built workable plan and then sell this HARD - to the investigating accountant.Above all demonstrate a professional and determined approach to saving a viable business - procrastinate at your peril - the bank will not wait for that silver lining. Q: I have heard that receivership is a rescue procedure - please explain? A: Many insolvency practitioners describe selling the business or its assets to a third party out of receivership as a rescue technique. Although some part of the activity may remain I cannot understand how the loss of almost all creditors' monies, jobs and all shareholders' funds, followed by the liquidation of the company, can be described as a rescue! Q: What happens if the receiver does not get the banks money back in full? A: He/she may rely upon the banks other securities. Obviously if the directors, shareholders or even a third party has signed a personal guarantee to pay money to the bank in the event of a failure to recover its loans, then the receiver pursues this as if it were an asset of the company. The receiver may also look at the possibility of legal actions against the officers of the company or debtors or creditors to recover funds Q: What happens to my personal guarantees in receivership? A: Unless the receiver recovers all loans due the bank after his/her fees (and any payments due to preferential creditors) then your PG will crystallise. In other words the receiver may seek to recover money from you. Q: What happens to the employees? A: This is a complex question that cannot be answered without a great deal of information. If the business is sold in a reasonable time then their employment rights can be continued with the new owners (under TUPE). If the receiver makes them redundant straight away they can claim for payments from the government (subject to a maximum amount). Again this is a complex question - email us if you want more detail.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.

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What is Receivership?

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