Individual Voluntary Arrangement 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.

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 undercapitalised or it may be difficult to get suitable finance. If large contracts are lost, this can 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.
• 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. The certainty that a decision will be reached on a specific day means the world can start again once this has successfully concluded.
• Modest cost. Costs are typically determined by the complexity of the partnership and the time involved by the advisors or insolvency practitioners. It is often a more cost-effective route than the cumulative costs of multiple bankruptcies.
• Controlled Disclosure. While the IVA is not advertised in the London Gazette like a bankruptcy, it is a formal process. Your creditors will be circulated a document and have the right to vote. It is also important to ensure your principal trade partners are aware so you can manage the restructuring professionally.
• 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 many cases, the debtor will repay what is affordable over 5 years—which may be less than the total debt.

Disadvantages of the IVA mechanism

• Obtaining future credit is difficult. It is important to understand that future trade credit or other personal credit will be very difficult to obtain during the term of the arrangement.
• Fees. Using insolvency and turnaround practitioners costs money. However, these fees are usually paid out of the monthly contributions rather than as a large upfront cost.
• The Insolvency Register. Your name will be entered onto the Individual Insolvency Register, which is a public database. While not advertised in the press, it is searchable by third parties.
• It is tough! It is vital that the debtor is determined to succeed. Three to five years is a long time, and the debtor must be ready to fight for the business.
• Change is essential. We have seen many partnerships fail because they return to old habits. You must be prepared to run the business professionally to accommodate the needs of the IVA.

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. Don’t worry too much about getting professional valuations initially; estimates are fine for the first discussion.

It’s vital you review all aspects of the business to see whether it is viable going forward. If problems can be resolved, an IVA is worth considering. If you would like more information, you can contact us on 0800 9700539.

To proceed, you will need to appoint a nominee (a licensed insolvency practitioner). The nominee will review your proposal to ensure it is fair to both you and your creditors before putting it forward.

The IVA proposal

It’s best to seek professional advice when writing the proposal as the legal process is complicated. It is important to include realistic costs and cashflow figures without over-estimating future profits. Ensure you don’t commit to making payments that are not affordable; the first year will likely be tough.

What is included?

The proposal includes a Statement of Affairs (SOFA), showing your financial situation and how the business became insolvent. It will also outline how much creditors will receive over the years.

In some cases, the proposal is filed at court to apply for an Interim Order. This protects the individual by “freezing” legal actions or bailiff activity while creditors consider the plan. However, many IVAs now proceed without an Interim Order if there is no immediate legal threat.

The Creditors Meeting (Decision Procedure)

Once the proposal is sent to creditors, a decision date is set (at least 14 days after the proposal is received). Nowadays, physical meetings are rare; decisions are usually made via a virtual meeting or a “deemed consent” process.

Creditors can question the proposal and suggest modifications. Since December 2020, HMRC is a secondary preferential creditor for taxes like VAT and PAYE. This means they must usually be paid in full before ordinary unsecured creditors receive a dividend. This change makes the structure of the proposal very important to ensure it is viable for all parties.

Voting at a creditors meeting

Voting is based on the value of the debt. For the IVA to be accepted, a majority of 75% in value of the creditors who choose to vote must approve it.

Example of Voting at an IVA Creditors Meeting

• Total Preferential Debt (HMRC): £7,000
• Total Unsecured Creditors: £37,800
• Total Debt in IVA proposal: £44,800

If creditors representing £26,500 of the debt cast a vote:

• In Favour: £25,123 (94.8%)
• Reject: £1,377 (5.2%)
• Proposal accepted: Yes

This vote binds all creditors legally, even those who voted against it or didn’t vote at all. “Being bound” means they cannot take further legal action to recover the pre-IVA debts, provided you keep to the terms of the deal.

What happens after the Creditors meeting?

Once agreed, the nominee becomes the supervisor. Their job is to collect your payments and distribute them to creditors in the correct order of priority (starting with preferential creditors like HMRC). Provided you make your payments and provide the requested information annually, the supervisor will report to the creditors and eventually issue a certificate of completion, discharging you from the remaining included debt.

If you’re interested in the IVA route, call us on 0800 9700539 for initial free advice.