Individual Voluntary Arrangement (IVA) - a detailed guide
An individual voluntary arrangement is a formal deal 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. 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, read our IVA FAQs page for more information and contact us on 0800 9700 539 if you have any specific questions about IVAs or any other options you’re considering. We can talk you through restructures and issues of viability 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
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
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 email@example.com to answer your specific business or personal debt problems. We are happy to help and will not charge for this advice.
Worried about poor cashflow? How to win new work? 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 written pre Covid-19 and there are some likely changes to insolvency rules regarding wrongful trading. Please see this page here.