If you are considering entering into an Individual Voluntary Arrangement (IVA) with your creditors you will naturally want to be confident that they will approve your IVA proposal. The overriding question is whether your offer will be sufficiently attractive to at least 75% of those creditors who choose to exercise their right to vote to persuade them to accept your proposals. So what do creditors or to be more precise your particular creditors want to see in your proposal documents.
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 (or indeed any part) 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. So let us take this as a fundamental requirement and assume that the IVA proposal is an honest one.
Clearly, the IVA proposal should also be the insolvent debtor’s best attempt to address their unsecured liabilities and the estimated return to creditors must be reasonable. This return is usually called the estimated (or projected) dividend and is often expressed as the percentage of the debts which the insolvent debtor promises to repay. For example if the debtor estimates that creditors will get back a quarter of the monies borrowed by the debtor then the estimated return is 25% or 25 pence in the pound. It is for creditors to decide whether the dividend is reasonable or not. Creditors make this decision taking into account the debtor’s circumstances and they exercise their judgment as to whether the offer is the debtor’s best attempt to address their debts.
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 probably 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, provided returns are up to date. The way HMRC looks at this issue is that the cost of making S/E returns is often minimal and even if the debtor is unable to make full tax and associated payments as they fall due, the failure to make returns indicates a deficit of goodwill and possible future problems if the IVA were to be accepted.
HMRC also puts great store in the principle of treating all unsecured creditors equally. They particularly dislike an IVA proposal where what is sometimes described as a hostage creditor seeks to be treated more favorably than other creditors. For an S/E person, a hostage creditor may, for example, be a critical supplier of goods and/or services to the debtor’s business, who will only continue to do business with the debtor if 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 is obviously preferential treatment for that creditor who is holding the debtor hostage. 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 may fail as a result which in turn may cause the IVA to fail. If on the other hand the debtor fails to disclose the liability to the hostage creditor and excludes it from the IVA, fully intending to service that debt secretly, than again the IVA may 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 if it is possible that in 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. Although such an outcome might well depend on some or all interest and penalties being frozen during the life of the DMP, 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 to the IVA proposal. 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 of say twenty years and the new debt was simply a consolidation of several existing debts with that creditor, then it would be less likely that that creditor would to reject the IVA, given the long term knowledge of the debtor’s financial history.
The principal other factors which may impact on the attitude of creditors to an IVA proposal are the past behavior of the debtor, the viability of the IVA, the charging of assets and the previous (and current) lifestyle of the debtor. Let us look at these in turn.
Creditors expect that the debtor will be open, frank and honest in disclosing all relevant matters in the IVA proposal. If a creditor is aware of a significant matter relating to the debtor’s prior financial history and relevant to the debtor’s current financial difficulties and the matter is not disclosed in the IVA proposal then that creditor would be strongly inclined to disclose the matter to the nominee, assuming that the creditor’s knowledge of the a matter is entirely legitimate and is based on prior business or personal dealings with the debtor. The Data Protection Act would not protect the debtor from such disclosure. In any case, it would not be surprising that that creditor would reject the IVA proposal, even without giving any reason.
Creditors will also exercise their judgment and discretion where the estimated dividend is so low that it is not financially viable for the creditor to approve the IVA. Suppose for example that the debt was £500 and the projected dividend in a five years IVA is 20p in the £. While the creditor could expect to receive a dividend of £100 over a period of five years, the administrative costs of providing a proof of debt and keeping the account open might be excessive and not worthwhile financially. Such a creditor might reject the IVA proposal.
A further scenario which arises is where the creditor has already taken legal steps to secure the debt by obtaining a charging order against the debtor’s property. Suppose that a creditor has already obtained an interim charging order when the debtor’s IVA proposal arrives. That creditor has two choices. The first choice is to proceed to obtain a final charging order and rely on that for the satisfaction of the debt hoping that the IVA will be rejected so that the charging order can be made absolute. If the creditor were to rely on the charging order, then that creditor would not be permitted to vote for or against the IVA and if the IVA were to be approved, the charging order would not be granted and the creditor could claim as an unsecured creditor in the IVA, receiving the same dividend as the other unsecured creditors. The second choice available is for the creditor to give up their security and submit an unsecured debt claim in the IVA and thus be permitted to vote for or against the proposal. If the IVA proposal were to be rejected, the creditor could re-apply for a charging order after the meeting of creditors is concluded.
The last scenario is where the lifestyle of the debtor leads a creditor to conclude that an IVA would be likely to fail in supervision. Creditors may look at how debts were accrued in the first place. If the debtor engaged in a lavish but unsustainable life style over a period of time apparently not caring whether such lifestyle debts could be repaid or worse, borrowed recklessly knowing that the debts could not be repaid in any reasonable time frame, then creditors would be inclined to reject such a proposal. If the debtor’s lifestyle involved chronic addictive behavior such as excessive gambling, drinking or taking drugs and if the insolvency was due to such behavior, creditors would have to be satisfied that such behavior had ceased and that the debtor had taken reliable corrective action to sustain the changed behavior, before accepting such an IVA.