Approving or rejecting an IVA can be a strange process
The insolvent debtor who offers a proposal for an Individual Voluntary Arrangement (IVA) to his or her (unsecured) creditors is really in the lap of the gods. This is because the creditors have all the power in the matter and can choose to accept the proposal as it stands, to reject it out of hand or to ask for changes to the proposal which usually have the effect of costing the debtor more than he or she intended to offer.
In fact this third outcome can carry within it the seeds of the failure of the IVA in its supervision stage, if the creditors are too grasping or greedy at the voting stage. The unfortunate debtor may feel pressurized to agree to modifications which require higher contributions to the IVA than what he or she can afford.
So there are three choices available to creditors: to accept the proposal as it stands, to accept it subject to the debtor agreeing to (sometimes draconian) modifications or to reject the proposal.
Only unsecured creditors are allowed to vote at the meeting of creditors. However, there can sometimes be a chink of light for the debtor if he or she has the ‘right’ mix of creditors and if the ‘right’ creditors vote. First of all not all of a debtor’s creditors need to vote for a decision to be made approving, rejecting or modifying the debtor’s IVA proposal. In fact as long as one creditor votes, a decision can be made. That is of course provided that all the unsecured creditors had the opportunity to vote.
Assuming then that more than one creditor decides to exercise their right to vote, what is the level of acceptance needed for the IVA to be approved? A simple way to look at it is that each creditor has one vote for every £ that the debtor owes to that creditor. So if there were eight creditors called A,B,C,D,E, F, G and H, to whom the debtor owed a total of $100,000 in the respective amounts of say £40,000, £26,000, £14,000, £8,000, £5,000, £4,000, £2,000 and £1,000 there would be potentially 100,000 votes. In practice of course, not all creditors exercise their right to vote. Of those who do vote, at least 75% of the cast votes must be in favour of the IVA for it to be approved and to be binding on all the creditors, including those who did not vote. Let’s look at a few examples of how the vote might go.
- Creditor A: £40,000
- Creditor B: £26,000
- Creditor C: £14,000
- Creditor D: £8,000
- Creditor E: £5,000
- Creditor F: £4,000
- Creditor G: £2,000
- Creditor H: £1,000
Suppose that only creditor H chooses to vote and accepts the proposal, then that decision is binding on all the other creditors and constitutes 100% acceptance.
Suppose creditor B votes to reject the proposal with all other creditors voting to accept it, then the proposal is rejected as only 74% voted to accept it and that decision is binding on all creditors.
Suppose creditor E votes to accept the proposal and creditor H votes to reject it and none of the other creditors cast a vote, then the proposal is accepted as that constitutes over 83% acceptance and that decision is binding on all creditors.
Finally suppose creditors A & B vote to accept the proposal and all other creditors vote to reject it, then the proposal is accepted with 76% voting for it and that decision is binding on all creditors.
Obviously there are many other possible voting scenarios in this example case. Everything depends on whether creditors choose to vote, on what their relative voting strengths are and of course on how they choose to vote. The nominee is responsible for summoning creditors to the meeting of creditors but even a creditor who has not received notice of the meeting is still bound by its decision. However a creditor who did not receive notice of the meeting may challenge the decision of the meeting on one of two grounds: that the approved IVA unfairly prejudices their interests or that there has been some material irregularity at or in relation to the meeting of creditors. There are time limits for a creditor to make such a challenge.
Creditors frequently propose modifications to a debtor’s IVA proposal. Many such modifications are intended to increase the estimated dividend to creditors. They may for example require the debtor to make higher monthly payments than originally proposed or to contribute a lump sum from for example the release of equity from re-mortgaging a property. The debtor may choose to accept such modifications, to suggest alternatives to the modifications or to refuse to agree to some or all of them, usually giving reasons why they are not acceptable. The chairman of the meeting will discuss the debtor’s response to modifications with the creditors and creditors may choose to alter or even remove the modifications, where the debtor has made a compelling case. However, if the debtor refuses point blank to accept the modifications and creditors are not amenable to altering or removing them, then the proposal is usually rejected.
The final choice open to creditors is straightforward rejection of the debtor’s proposal as is their prerogative, since they did provide credit to the debtor and can demand that it be fully repaid provided that their decision is made in compliance with the principles of treating their customer fairly. In rejecting an IVA proposal outright, creditors may feel for example that the IVA proposal is a totally inadequate attempt at repayment or they may feel that the prospects of the debtor adhering to the terms and conditions of the IVA are poor.