The first thing that creditors look for in an IVA proposal is the truth. They expect the debtor to be open, frank and honest. After all it is their money which is at stake and if a debtor is seeking their agreement to write off a large percentage of their liabilities via an IVA, the least they expect to see in the proposal is the truth, the whole truth and nothing but the truth.
The IVA proposal should be the debtor’s best attempt to address their unsecured liabilities and the estimated dividend – the amount that creditors will be repaid over the life of the IVA – must be reasonable. Apart from the credibility of the proposal and the expectation of a reasonable dividend, there are a number of other criteria which creditors apply. Take the case of a self employed (S/E) person who has liabilities to HM Revenue & Customs (HMRC). If the debtor has a history of non-compliance then HMRC are likely to reject the proposal. The most frequent such non-compliance and the most serious one is the failure to make S/E returns to HMRC. If S/E returns are up to date, HMRC may well accept the IVA proposal even when the liabilities to HMRC are substantial.
HMRC also put great store in the principle of treating all unsecured creditors equally and they particularly dislike a proposal where what is sometimes called a ‘hostage’ creditor seeks to be treated more favorably than other creditors. For a self employed person, a hostage creditor is a critical supplier of goods and/or services to the debtor’s business and who will only continue to do business with the debtor on the condition that they are excluded from the debtor’s IVA and if they receive payment in full for all debts incurred by the debtor prior to the IVA being approved. This would obviously be preferential treatment of that creditor. From the debtor’s point of view, it’s a case of damned if I do and damned if I don’t! If they include the hostage creditor’s debt in the IVA, that creditor will stop supplying critical goods or services and the debtor’s business is likely to fail. If the debtor’s business was to fail, it would be highly likely that as a result the IVA would fail. If on the other hand the debtor fails to disclose to creditors the debt to the hostage creditor and excludes that debt from the IVA, fully intending to service that debt secretly, than again the IVA is bound to fail if and when the supervisor of the IVA or another creditor discovers the preferential treatment. In these circumstances the debtor’s business is also likely to fail. Such a debtor could hardly be described as being open, frank and honest.
Creditors may also reject an IVA proposal if it is possible that if the debtor were to enter a Debt Management Plan (DMP), all creditors could be paid in full in less than ten years and in some cases in a period of one hundred months. Such an outcome might well depend on some or all interest and penalties being frozen during the life of the DMP and that is by no means guaranteed, given the varying approaches that different creditors adopt towards a DMP.
The relationship between the creditor and the debtor is also a significant factor in shaping the creditor’s attitude. If the debtor is a relatively new customer and the debt was incurred within the last six months, it would not be surprising for the creditor to reject the IVA. On the other hand if the debtor was a long standing customer – say for ten or more years – and the new debt was simply a consolidation of several existing debts with that creditor, then it would be surprising if that creditor were to reject the IVA, given the long term knowledge of the debtor’s financial history.