A concern for people who find themselves insolvent and who are considering entering into an Individual Voluntary Arrangement (IVA) is whether they can afford the costs and fees of the process. While this is an understandable concern, it should not really be a worry. Firms which provide insolvency services can reassure debtors on this matter and put debtors’ fears to bed quickly.
In the first instance it is really the creditors who pay the costs and fees of the IVA since the monies which the insolvent debtor contributes to the IVA goes towards repaying the debts incurred by the debtor with his or her creditors, in part or in a minority of cases in whole. The total amount contributed by the debtor over the life of the IVA is sometimes called the IVA ‘pot’ or the IVA fund’. The costs and fees of administering the IVA are paid from this fund.
In relation to the payment of fees, let us look at the role of the Insolvency Practitioner or the IP. The IP is called the Nominee up to the time when the IVA is approved (or rejected) at the Meeting of Creditors and, assuming the IVA is approved at the Meeting of Creditors, the IP is called the Supervisor. These are simply the terms used in the insolvency legislation and reflect the fact that the role of the IP changes somewhat between the time when the IVA proposals are offered to creditors and the time when the proposals are accepted. Under the law, the Nominee IP need not be the same person as the Supervisor IP although generally the same IP carries out both roles, provided creditors are happy with that arrangement.
The Supervisor IP receives the contributions to the IVA from the debtor over the agreed term of the IVA, usually five years, and he or she is responsible for controlling the fund and making payments from it. These payments can be broadly broken down into three types: dividends to creditors; fees payable to the IP (Nominee & Supervisor) and disbursements such as the cost of registration of the IVA, insurance. Following a court case in the last year, there is no VAT payable on the IP fees for insolvency services.
The amounts of the IP fees are not arbitrary. These are set when the Meeting of Creditors approves the IVA in the first place. At least 75% of the voting creditors would have had to agree to these fees. The usual practice is that the IVA proposal incorporates the details of the proposed IP fees and IVA costs and the creditors may amend these, by way of modifications to the IVA, if they think they are too high. Once the IVA is up and running, the IP may not charge more than the previously agreed amounts without the express permission of the creditors. Again at least 75% of creditors, as measured by the value of the debts, have to agree, even when the work of supervising the IVA turns out to be more extensive and costly than originally anticipated. Creditors are not slow to reduce proposed fees if they think they are excessive since the lower the fees the higher the amount of debt that will be repaid to them or to use the usual terminology, the higher the dividend to creditors.
Thus, the insolvent debtor, who is proposing the IVA, should not be concerned about his or her capacity to pay the IVA fees and costs since they come from ‘the IVA fund’ and do not constitute an additional burden to be borne by the debtor.
Firms which offer insolvency services such as Individual Voluntary Arrangements (IVAs) or other financial solutions do so because it is a business and because they have an expectation of making a profit from the business. If they do not make a profit, then ultimately they go out of business. In the last few years, a number of IVA providers have ceased to trade for this very reason. For some of the insolvency firms which had to cease trading, the main underlying cause was the decision of creditors to sharply reduce the fees that they were willing to pay to the providers of insolvency services. That decision was taken about three years ago. One of the mechanisms used by creditors to achieve fee reductions was to appoint and authorize agents who would act and vote on their behalf and deal with the IVA proposals put forward by debtors and the insolvency firms who represented them. There are costs in utilizing the services of such agents but creditors felt that they would be self financing in that any money saved from reductions in IP fees would be more than enough to cover the costs of agent services. In addition creditors felt that there were efficiencies to be gained from the economy of scale which using such agents would afford.
The agents would build up expertise in due course and would represent a wide range of creditors. They could standardize the approach to IVA proposals in the interests of the creditors whom they represented. Rather than a diverse bunch of creditors each seeking to apply their own often conflicting modifications to a debtor’s proposal, they could engage the services of one or two agents. These agents would be able to standardize modifications to debtors’ IVA proposals and have the voting strength to get them approved. Most modifications have the goal of increasing the dividends to creditors by means of either increasing the debtor’s contributions to the IVA or by reducing the administration costs of the IP or by a combination of both means. Using agents in this way had and still has a cartel like effect in so far as the interests of the creditors are merged and maximized and the interests of the debtor as represented by the IP are suppressed.