The Disposition of Lenders With Regards to Proposals for IVAs
Most people would assume that when it boils down to it, lenders would adopt the practical attitude to each and every IVA proposal, voting in favour of it when it affords the best possibility for the maximum gain on the loaned monies and voting against it if another course of action offered or promised a higher yield. In real life, things are not really that uncomplicated. Despite the fact that a particular IVA offer is obviously the best offer the borrower can make from a simply monetary viewpoint, lenders might sometimes deny it for reasons apart from on the rationale of the financial yield.
HMRC are sometimes the largest creditor in an IVA, particularly in the event the debtor is self employed. If the self employed person in debt has been non-compliant by failing to make self employed tax returns to HMRC for an extended amount of time or perhaps on a chronic basis, then HMRC is likely to decline the IVA proposal and may also threaten the debtor with bankruptcy. The obvious reason for the rejection of the IVA proposal but maybe not the only reason is to stimulate, persuade or even coerce the person in debt to get his or her tax returns in order and get them current.
If there are indications or possibly even a hunch that the consumer has, in the years prior to the IVA being proposed, looked after some creditors preferentially to the detriment of the interests of other creditors, then those creditors who consider that their interests have been detrimentally affected may well vote to turn down the offer. Precisely the same course of action may be taken by creditors who believe that the borrower has been engaged in transactions at an under-value, in the time prior to the IVA being offered. These kinds of suspicions may be very difficult or in fact impossible to prove but creditors may want to penalize the debtor for such perceived transgressions even at the expense of a lower yield if the debtor was to be bankrupted.
There is also a tendency for lenders who have just recently loaned funds to the debtor to decline IVA proposals for the reason that the debtor didn’t disclose their risky personal financial situation to them when such relatively new loans were being taken out. Creditors of course aren’t required to reveal any reasons behind their rejection of IVA proposals and some debtors may be completely puzzled by rejections, particularly where they feel they have behaved honorably and with integrity when they borrowed the funds in the first place. Of course, if an alternative option like a debt management plan was likely to yield a significantly enhanced yield to creditors, it is very reasonable that lenders may be inclined to decline the IVA offer. A debt management plan affords the prospect of money owed being paid back in full if the term is long enough, perhaps up to a decade, although in most debt management plans creditors normally really need to suspend demanding interest and penalties to give the debtor a fighting possibility of keeping up with the payments.
There are some less obvious reasons for rejections of IVA plans by creditors. A serious issue is the factor of trust. Creditors are expecting the borrower to be transparent, frank and honest in revealing all significant issues in their IVA proposal. Take a case when a lender is conscious of a serious matter concerning the debtor’s prior financial history and connected to the debtor’s current financial difficulties and that matter is not divulged in the IVA proposal. Assuming that the creditor’s knowledge of such a matter is wholly legitimate based on previous business or personal dealings with the person in debt, the Data Protection Act would not give the debtor any protection from the lender revealing the issue to the nominee. Such a lender would be likely to reject the IVA offer without offering any explanation even if that lender felt constrained from divulging details of the debtor’s financial background.
Yet another scenario is where the projected dividend is so low that it is not financially viable for the lender to consent to the IVA. Suppose for instance that the liability was £500 and assume that the projected dividend in the proposed IVA of five years duration was 20p in the £. The creditor could anticipate that £100 of the debt would be paid back throughout five years. The management expenses of giving a proof of debt and holding the account open might not be worthwhile financially. Such a lender might vote to turn down the IVA proposal or abstain from voting altogether.
A major issue might also arise when a creditor has already, prior to the IVA proposal being put forward, taken steps to secure the debt by obtaining a charging order against the debtor’s property. Suppose that that lender has already obtained an interim charging order when the debtor’s IVA proposal is received. The lender is then faced with two choices. The first option is to proceed to get a final charging order and depend on that for the satisfaction of the liability hoping that the IVA will be declined so that the charging order can be made absolute. If the lender were to depend on the charging order for the satisfaction of the debt, then that creditor would not be permitted to vote for or against the IVA. If the IVA were to be approved the charging order would not be issued and the creditor could only claim as an unsecured creditor in the IVA and could only receive the very same dividend as the other unsecured creditors. The second choice available is for the lender to surrender their security by withdrawing the application for a final charging order and send in an unsecured debt claim in the IVA. That would permit the lender to vote for or against the proposal. If the IVA proposal was declined at the Meeting of Creditors, the lender could then re-apply for a charging order.
A final scenario is where the previous and indeed existing lifestyle of the debtor is known by a lender to be excessive leading the creditor to the judgment that an IVA would be likely to fail in supervision. Lenders study how debts were amassed to begin with. If the borrower engaged in an opulent but unsustainable lifestyle over a period of time apparently not caring whether liabilities accrued could be paid back or borrowed recklessly realizing that the liabilities could not be repaid in any realistic timeframe, then lenders would be likely to reject such a proposal. If the debtor’s lifestyle involved long-term addictive behaviour such as excessive gambling, drinking or drug taking and if the debtor’s insolvency was likely to be because of such behaviour, creditors would have to be confident that such habits had discontinued and that the person in debt had taken effective corrective action to sustain the changed behaviour, before agreeing to such an IVA.