What is an individual voluntary arrangement and what does it seek to achieve? A Lexis PSL document produced in partnership with 11 Stone Buildings & FRP Advisory ® •Nature of an individual voluntary arrangement •Purpose of an individual voluntary arrangement •Composition or scheme of arrangement •Alternatives to individual voluntary arrangements Nature of an individual voluntary arrangement An individual voluntary arrangement (IVA) is an agreement entered into between an individual and their creditors (and possibly with third parties) for a composition of that person’s debts or a scheme of arrangement (scheme) of their affairs. The type and content of the composition or scheme is open-ended and is a matter for the debtor and their creditors with the assistance of an insolvency practitioner (IP) (described as the nominee before the IVA is approved, and the supervisor thereafter). References: IA 1986, s 253(1) An IVA is effectively a contract, the terms of which are to be found in the IVA proposal. A private contractual arrangement would however require the assent of all of an individual’s creditors in order to become a globally binding agreement. This would obviously not be feasible in the large majority of cases. An IVA, by contrast, is binding on those creditors who voted against the proposal (or who did not vote at all), provided the requisite majority of votes in favour were obtained, and subject always to possible challenges. References: IA 1986, s 260 Although judicially recognised as a species of (statutory) contract, an IVA proposal does not amount to an offer for the purposes of the Insolvency Act 1986, s 271(3) (by which provision a bankruptcy petition may be dismissed in circumstances where the debtor has made an offer to secure or compound a debt, which offer has been unreasonably refused by the petitioning creditor). References: IA 1986, s 271(3) Re a debtor (No 2389 of 1989) [1990] 3 All ER 984 As a result of its essentially contractual nature, the meaning and effect of any given IVA must be determined by reference to (and by construction of) its terms. Practitioners should bear in mind that not every successfully completed IVA will result in the discharge/release of a debtor’s liabilities. References: Johnson v Davies and another [1998] All ER (D) 104 In practical terms, an IVA takes the form of a written document (described as the proposal) that contains the terms on which the debtor intends to compromise or rearrange their various relationships with their creditors. The proposal will ordinarily be put together with the assistance of the nominee (in most cases the proposal is drafted by nominee with debtor’s input on the proposal). Once complete, the proposal will be sent out to the creditors and a meeting summoned. The proposal (with the possibility of amendments) will then be voted on at the meeting of creditors. Produced in Partnership with 11 Stone Buildings & FRP Advisory Purpose of an individual voluntary arrangement An IVA is the machinery by which a debtor is able to enter into an agreement with their creditors that is binding on them. IVAs are proposed in circumstances where an individual is in financial difficulties and, in some occasions, following the presentation of a bankruptcy petition. The end game is usually the release of liabilities outside of the context of bankruptcy (and without the stigma and prohibitions that that regime entails). Composition or scheme of arrangement IA 1986 provides that an IVA may comprise either a composition with creditors or a scheme of arrangement. In practice, IVAs frequently comprise a mixture of composition and arrangement. A composition is an agreement whereby the person’s liabilities to their creditors are compounded. If approved, creditors bound by the IVA will be paid a dividend representing X pence in the pound (as opposed to a forecast Y pence in the pound were a bankruptcy order to be made against the debtor). X will ordinarily be substantially greater than Y in order to incentivise the creditors to vote in favour of the voluntary arrangement. This will usually be achieved by some of the following: References: IA 1986, s 253(1) References: IRC v Adam & Partners [2000] All ER (D) 1315, [2001] 1 BCLC 222 • the injection of third-party funds • inclusion of excluded assets • contributions over and above those that would be paid by the debtor in bankruptcy • the costs in an IVA being less than bankruptcy, ie avoiding a tax on all asset realisations in all bankruptcies In order to amount to a composition, a monetary payment or some other valuable consideration must be given to the creditors in return for the compromise of their claims. If the arrangement effectively amounts to an expropriation of the unsecured creditors’ rights with no return, it will not be considered to be a composition. A scheme of arrangement is limitless as to content. It differs in nature from a composition and involves something less than the compromise of creditor claims. As with a composition, a scheme must give rise to a quid pro quo with the creditors. A proposal cannot be regarded as amounting to a scheme if there is nothing for the creditors to accept. It will generally take the form of an assignment of certain assets (often real property) to the nominee/supervisor to be used within the IVA. Schemes may also involve third parties who are prepared to give financial assistance to the debtor, thereby increasing the return to creditors. In its most simple form, a scheme may amount to a moratorium on creditor claims/ enforcement for the greater good, with payment of a dividend at the end of the moratorium period. A moratorium by itself amounts to a scheme for the purposes of IA 1986, s 253(1). References: IA 1986, s 253(1) Re Bradley-Hole (a bankrupt) [1995] 4 All ER 865 The distinction between compositions and schemes , which do not involve a compromise of creditor claims, is important. In circumstances where the terms of an IVA do not provide for a release of the creditors’ rights, by implication the balance of those debts (minus whatever dividend was paid during the arrangement) will become payable whenever the IVA completes or the moratorium expires (whichever is the sooner). Produced in Partnership with 11 Stone Buildings & FRP Advisory Alternatives to individual voluntary arrangements IVAs are themselves often regarded as alternatives to bankruptcy. A popular alternative to the IVA at present is a debt management plan. Such plans are unregulated and operated outside of the context of the insolvency legislation. In essence, the debtor makes monthly payments to a debt management company, that company having struck a deal with the debtor’s creditors. That payment (subject to the deduction of a commission fee) is then distributed to the creditors. In some circumstances, debt management plans may be a preferable alternative to an IVA. References: Mond v MBNA Europe Bank [2010] EWHC 1710 (Ch), [2010] All ER (D) 98 (Jul) Debtors continue to be able to enter into deeds of arrangement with their creditors and this mechanism has not been abolished by the insolvency legislation. The problem with deeds made under Deeds of Arrangement Act 1914 (DAA 1914), however, is that they can be easily frustrated by one of the debtor’s creditors petitioning for bankruptcy. Consequently, deeds of arrangement are unpopular and exceptionally rare in practice. References: DAA 1914 IA 1986, s 260(3) Produced in Partnership with 11 Stone Buildings & FRP Advisory Produced in Partnership with 11 Stone Buildings 11 Stone Buildings insolvency barristers have an exceptionally strong reputation in the market and act in all matters related to contentious and non-contentious personal and corporate insolvency. The major legal directories have consistently recommended them as a leading insolvency set and in October 2011 they won as ‘Set of the Year’ for Insolvency/ Corporate Restructuring at the Chambers Bar Awards 2011 while several of their barristers have been nominated as ‘Insolvency Junior Barrister of the Year’ at the same awards. Three of the set’s members sit part-time in the High Court as deputy Registrars in Bankruptcy and the Companies Court. 11 Stone Buildings also have experience in proceedings before the Disciplinary Tribunal. The interplay between insolvency and other areas such as property, pensions, banking, fraud and general commercial litigation is at the heart of this Chambers’ expertise. Their track record demonstrates that they deal with very complex cases and having that multidisciplinary expertise in-house adds to that ability. If you would like to contribute to Lexis®PSL Restructuring & Insolvency please contact: Jenisa Altink-Thumbadoo LexisNexis Halsbury House 35 Chancery Lane London, WC2A 1EL jenisa.thumbadoo@lexisnexis.co.uk +44 (0) 20 7400 4619 Produced in Partnership with 11 Stone Buildings & FRP Advisory A division of Reed Elsevier (UK) Ltd. Registered office 1-3 Strand London WC2N 5JR Registered in England number 2746621 VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge Burst logo are trademarks of Reed Elsevier Properties Inc. © LexisNexis 2012 0712-044. The information in this document is current as of July 2012 and is subject to change without notice.