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. This is the first of two articles which look at the attitude of creditors towards an IVA proposal.
Obviously the proposal should be the insolvent debtor’s best attempt to address their unsecured liabilities and the estimated dividend 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 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 Self Employed returns to HMRC. If Self Employed 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 often 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 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 Debt Management Plan, that is by no means guaranteed, given the varying approaches that different creditors adopt towards a Debt Management Plan.
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 twenty 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.
In the 2nd article in this series, we will look at factors such as the past behaviour of the debtor, charging of assets and IVA viability which may impact on the attitude of creditors to an IVA.