Frequently asked questions pertaining to IVAs and how they work
Q: What is an IVA really?
A: Think of it is a deal. Closing a business will often result in very little return for its creditors. This is because the costs of closure and the loss of value of its assets leads to very low levels of money being generated for your creditors. If the business can be viable (can generate some profit in the future) doesn't it make sense to use those profits to pay back something to the creditors? This is the basis of an IVA it is a deal between you and creditors to repay back something over time from the business and to ensure that creditors interests are maximised.
Q: What is needed to make an IVA work?
A: It may be necessary to make changes to the business but if the underlying business idea is sound and you are determined to make it work and succeed, then an IVA can work. If however the business isn't viable, no matter how it is restructured, then you should consider other options such as bankruptcy.
Q: Why have I not heard of IVAs?
A: Over 6,000 people enter IVAs each year. It is a well regarded, ethical and moral way to deal with debt problems whilst avoiding bankruptcy. Also its not advertised and is discrete so most people are not aware that an IVA is in place.
Q: Why not just close the business?
A: If your determination is in question or you cannot see how the business can be viable, then closure is necessary. Remember, if you cannot pay off the business debts the creditors can press for action or for your bankruptcy. Of course you should consider the options page to decide what is the appropriate course of action. It is probably better to have considered your objectives before making any decision.
Q: Isn't bankruptcy a better option?
A: If the business is not viable, possibly. Also consider trading out, refinancing and debt consolidation. But the key test is - is it viable? And are you determined? If you answer no to either of these, then bankruptcy maybe the most sensible option. Consider your objectives and your options first before making such a decision.
If you have any doubt as to your current position and what you need to do, please do not hesitate to contact us by e-mail or by our freephone number.
Q: What are the benefits of an IVA?
A: See IVA guide for detailed discussion of this. In summary: it is a deal that prevents creditors from taking legal or debt recovery action against you and the business. It allows structured repayment based on affordability. It can be relatively cheap and it is a quick process. IVAs can give a breathing space while you work on the business to see if it really can be profitable. This is known as a holding IVA.
Q: What is a holding IVA then?
A: A "holding" IVA can be used where predictability and forecastability are not strong in your business. It maybe that the business has only just arrived at a point where sales are at a sensible level and it may take some time before the company or business can be profitable. The holding IVA can be used to freeze the current debts until more realistic forecasts can be made of the business's ability to repay those debts. This is a very specialist area and you should only take advice from experienced turnaround and recovery experts: In this regard please feel free to contact us on 08009700539.
Q: I have heard that the tax authorities don't like IVAs, so when would they and when wouldn't they support them?
A: Whilst HMRC will not support badly structured or poorly conceived IVAs, they will support sensible deals. It is our experience that the Inland Revenue and VAT creditors want to see the problem dealt with and crystallised.
They may not support a repeat IVA or where they believe that a fraud has taken place.
If the debtor (you) does not recognise, or take action to deal with the situation they will eventually take action to recover their debts. This is the key - you must take action to deal with the situation if you're insolvent.
Q: How much does it cost?
A: This is a very difficult one to answer because, of course, this varies on a case-by-case basis. But the main areas of cost are as below. If you have any questions with regard to this please speak to a turnaround practitioner or an insolvency practitioner or call us.
- Turnaround practitioners or insolvency practitioners fee. This fee is required to pay the advisor who will assist you in structuring the deal. This can vary from as little as 0 (this is where the advisor takes his payment after the success of the deal) up to 6,000.
- Nominees fees. A fee for the insolvency practitioner who is known as the nominee - see the guide on IVA's - this is typically 500 to 4,000 depending on the complexity of the case.
- Legal fees. Before the deal proposal is sent to creditors for their consideration it has to be filed at the local county court. This can cost up to 120. The debtor also needs to swear an oath that the document is as accurate as possible: this costs between 7- 10.
- Supervisors Fee. Once the creditors have agreed the deal the cost of administration of the deal, dealing with creditors and paying out the money to them in order of priority is typically what the supervisor's work entails. It varies from case to case but can be between 750 and 3,000 per annum depending on the length and complexity of the case.
Q: How do I work out how much I can pay back to the creditors?
A: This is a very important question. It is vital to do a deal with creditors that your business can live with and achieve. There is no point in trying to repay more than the business can afford. In all cases you must talk to and work with an advisor who can understand your business and one who understands the IVA mechanism.
If you are speaking to such advisors or insolvency practitioners ask them how would they determine the repayment level. If they answer "you can write off most of your debts without worry" then this is not a good answer and may mean the advisor is not an appropriate person to deal with. If they say that you should pay back as much as possible in a short a term as possible" this may also be bad advice.
Ask yourself is this the right advisor to be working with?
As a rule of thumb however, the business and your own personal outgoings must be exceeded over a significant period of the IVA period by your profits. This excess (after allowing for future tax deductions) is used as the contribution to your creditors. But, remember seasonality and business shutdowns such as Christmas and ensure that the payments can be made in all periods of the year.
At soletrader-rescue.com we do not usually encourage IVAs that consider making lump-sum payments based on disposal of assets or a large sale or contractual payments. Such a payment is often far too difficult to quantify and forecast. It is important that the business makes modest ongoing payments on a basis of affordability rather than making promises about large lump payments that they may not able to keep. If the business or you personally are subsequently able to produce a larger amount of money, or windfall receipt, then the deal can be structured to allow the supervisor to ask for the larger payments in an achievable time scale.
Q: Say I am two years into the IVA and my business has changed significantly and I can't keep up payments any more. What can I do?
A: This is a common question. It is rarely possible to forecast businesses accurately and the only thing that can be certain is that CHANGE is inevitable. If the proposal is built round a deal where payments are much too high, perhaps they were wrong in the first place, no matter, a revised deal can sometimes be struck provided the reasons are sensible and creditors agree. But, take care to offer to pay reasonable amounts in the first instance. If the business does become unviable then bankruptcy may be necessary if restructuring of the deal is not possible.
Q: I have heard you can write off up to 95 per cent of your debts?
A: This is not the aim of the Insolvency Act or the IVA mechanism. The IVA is designed to maximise creditors interests and avoid bankruptcy for the debtor. The deal should be structured to pay back the creditors as much as is possible over a period of time. If you are seeking to "stuff" the creditors: they will spot this.
Work up a solid, achievable proposal and if the business cannot afford to repay more than say 10 to 30 per cent and the creditors agree, then this is a deal. However, the ultimate aim should be to repay creditors 100 pence in the pound if at all possible. Be wary of people who seem to want you to hurt your creditors.
Q: What happens if a creditor votes against the deal?
A: See the detailed guides to voting in IVAs. But briefly, providing more than three-quarters of creditors who actually cast a vote, do vote in favour of the deal, the rejection of other creditors does not matter. They are legally bound by the majority decision. If you have any fears or concerns about this please feel free to talk to us on our freephone number above.
Q: What is an interim order?
A: See Guide to IVAs for fully detailed guide. Basically it protects the debtor while a deal is proposed, considered and a creditors meeting held to reach a decision on whether the deal is approved. It means that no creditors can take further legal action against the debtor (you) without leave of the court.
Q: I have heard the term moratorium used. What does this mean?
A: See guides to IVA for full details. Basically this is the same as the previous question. A moratorium is a protective mechanism used to ensure that the creditors, as a whole, have time to consider your proposals.
Q: My business is about to start making very good profits. Why not just do an informal deal with the creditors?
A: One must weigh up the advantages and disadvantages of an IVA and do the same for trading out and or refinancing. A word of warning. Do not be too optimistic and offer repayment deals that you cannot stick to?!
For example if you owe HMRC 10,000 and your business is forecast to make 15,000 over the next 12 months, by promising to pay the HMRC over 12 months you're going to absorb more than 66% of your profits over that period just paying back that tax. Will this leave the business adequately capitalised?
Q: Wont creditors' just reject the deal anyway - I haven't paid them and they will be angry?
A: In almost all cases we have been be involved with, the easy answer is no. However some (usually smaller) creditors are intent on rejection out of anger, spite or just to see a competitor removed. Produce a quality, well-structured deal though and it will generally gain majority acceptance.
Q: I have had a visit from a bailiff or Sheriff what can I do?
A: If the creditors have asked them to visit they have clearly lost confidence in you and the ability to collect their money using conventional means. Consider using the IVA or bankruptcy now. Read the IVA guide and FAQs for bankruptcy and IVA FAQs. Also see legal actions guide.