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Individual Voluntary Arrangement or IVA for Sole Traders

14th April, 2020
Categories:
Keith Steven

Written ByKeith Steven

Managing Director


07879 555349

Keith is the author of the content on this comprehensive rescue, turnaround and insolvency website. He has expert knowledge on the company voluntary arrangement (CVA) mechanism

Keith Steven
  • Individual Voluntary Arrangement (IVA) – a detailed guide
  • My business is viable, can I go into an IVA?
  • A guide to IVAs
  • Advantages of an IVA
  • Disadvantages of an IVA
  • The IVA process
  • Producing the proposal
  • Creditors meetings and voting
  • Example of Voting at an IVA Creditors’ Meeting
  • What happens next?

Individual Voluntary Arrangement (IVA) – a detailed guide

An individual voluntary arrangement is a formal deal made between an individual (who is in debt) and the lender or business. Often a sole trader can use an IVA to help reorganise debt and restructure the business.

If, as a sole trader, you can’t pay tax payments when they fall due, the business is insolvent or under financial pressure. An IVA could be the best solution.

An IVA allows the sole trader to make debt repayments on a regular basis over a number of years, helping combat his or her debt problems in a realistic way which they can afford to pay. It is more beneficial to creditors than other methods, like bankruptcy, as debt will be repaid over time. With bankruptcy, creditors might receive nothing. Think of it this way; if you are owed money by someone and they ask for time to pay it, wouldn’t you probably agree? Now, if they said that they had a problem and they want to pay you say 25p in the £1 or they will have to go bankrupt and you would get 0p in the £1, which one would you agree to?

My business is viable, can I go into an IVA?

Yes, if your business is viable or you have disposable assets that can be turned into cash, you can enter an IVA.

If the business has never made profit and sales aren’t increasing enough to cover overheads, an IVA is not suitable as the business isn’t viable. You should close it as soon as possible and start bankruptcy proceedings. You may be able to arrange a deal with creditors if assets can be sold or liquidated to recover debt for creditors.

A guide to IVAs

See our flowchart of the IVA process.

When a business is struggling, it can be difficult for sole traders as it is the individual who is liable for the business debt, much like partners in a partnership. If problems aren’t dealt with straight away, debt can build up and there is a real risk of bankruptcy.

For most small businesses, it is not uncommon to suffer from undercapitalisation and lack of finance. Often, there will be only be a few big contracts and if one is suddenly lost, this can put huge financial pressure on the business. Once cashflow begins to suffer, the problems are harder to manage and more time will be spent with worried creditors, giving you less time to focus on marketing, sales and general running of the business.

If this sounds familiar, you need any more information, or specific questions answered about IVAs, contact us on 0800 9700 539. We can talk you through, free of charge.

If you wish to go into an IVA, you’ll need to prepare some information first, including a list of ALL of your creditors and a list of all of your assets (with estimated values). Ensure you provide estimates of the debt you owe to each creditor – this information will be used in the IVA proposal.

Advantages of an IVA

  • It gives an opportunity to review the business. If is viable and has a future, an IVA can be proposed and the sole trader can move on with the business. Essentially, an IVA can eliminate all worry as it is putting the business back on track.
  • The sole trader can put focus back into the business, rather than dealing with irate creditors from all angles.
  • It’s a short process in the grand scheme of things and can save your business at the same time!
  • An IVA, unlike administration or liquidation, is not advertised so reputation of the business can stay unharmed. Your creditors will of course know about the financial issues but it is best they do know as soon possible so they have a chance to vote and modify plans. We recommend you let trade partners know so they are aware of any restructuring. Call us on 0800 970 0539 for further advice on how to proceed.
  • Opportunity to reduce debt by paying a proportion of what is owed
  • Creditors may get more in return over the long run if the business continues trading and profits rise.

Disadvantages of an IVA

  • It may be difficult to obtain future credit, however it’s likely you’ve already had problems with this.
  • The more complex the case, the higher the fee. An IVA is often more cost-effective than bankruptcy.
  • There may be some publicity even though it is not advertised as your creditors will know. A plan of action can be set up should this happen.
  • You’ve been through tough times already and even though an IVA will help relieve problems, it will still be tough over the next year or so. You need to be realistic and ask yourself whether you’re prepared to fight for the business.
  • An IVA on its own won’t simply turnaround your business. You need to be willing to change whatever needs changing to ensure the business is a success. Ensure you don’t go back to old-ways.

The IVA process

For an IVA, you will need to appoint an advisor or a nominee to prepare the proposal. They will deal with all creditors and collect all necessary information to go forward. In essence, the nominee will take all creditor pressure away which can be a huge relief to clients.

If you employ an advisor, you will eventually also need a nominee (nominated supervisor) as you need a licensed insolvency practitioner to present the proposal at court. He or she will review the proposal and if satisfied, will act on behalf of the sole trader and file it at court as well as send it to creditors.

Producing the proposal

While you can write the proposal yourself, it is best to seek advice and assistance from insolvency advisors as there are complex legal processes involved. The final proposal must show realistic cashflow, sales and cost figures with no high expectations of future sales or contracts. Problems won’t be solved immediately so expect a tough year ahead. Don’t make any promises you can’t keep and don’t make large payment, this could backfire and put you in a worse position. Remember, it’s a marathon, not a sprint.

Along with the above, the proposal will need to include reasons why the business is insolvent and how creditors will be repaid as well as how much. Creditors will need to see a statement of affairs (known as SOFA) within the proposal to help them make a decision. This document includes all financial information and figures, giving an accurate account of the business’s position. The SOFA would also include details on the expected outcome of an IVA compared to other options, like bankruptcy.

Once everything is prepared, the proposal can be filed at court. It will be circulated among creditors at the same time a moratorium is applied. This protects the sole trader against legal actions during the process up until the creditors’ meeting (which takes place a minimum period of 14 days after the proposal has been posted to creditors.

The moratorium or interim order can be applied before the proposal is completed or at the same time the proposal is filed (known as concertina application). The latter is often the most efficient method.

Creditors meetings and voting

As mentioned above, creditors have 14 days to consider the proposal and to put forward any objections or concerns before the creditors’ meeting. At this meeting, the proposal can be questioned and modified as the nominee and creditors see fit.

An IVA can only go ahead if over 75% of creditors (by value) accept the proposals by vote or proxy. Debt of the creditors is added up and each creditor has a vote according to the amount of money he or she is due 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

Note that creditors can appoint a different insolvency practitioner to the one nominated by the sole trader if they wish. This rarely happens but it is why nominees usually ask for payment before the creditors meeting.

What happens next?

Once voting has come to an end, the nominee will state that the proposal has been agreed (if majority vote for) and all modifications and reports will be sent to creditors. The document is filed at court and the interim order is lifted (usually one or two weeks after the meeting).

It is then up to the nominee to supervise the arrangement between the creditors and sole trader over the term of agreed years. Information must be reported to the creditors during the IVA and payments will be made accordingly.

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.

We hope that this guide has been useful for you and that it answers a lot of questions. IVAs are very simple tools in principle but with every case being different we cannot give answers to all questions in this guide. So, please feel free to call us now on 0800 9700539 or e-mail us at info@ksagroup.co.uk to answer your specific business or personal debt problems. We are happy to help and will not charge for this advice.

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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. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)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.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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