This is the second of two articles which look at the attitude of creditors towards an IVA proposal.
In the first article we looked at some aspects of how HM Revenue & Customs (HMRC) view an IVA proposal particularly in relation to non-compliance and preferential treatment of creditors. We also looked at the thorny problem of a debtor proposing an IVA having incurred recent debts and particularly when the credit is obtained from a new or relatively new creditor. Finally we looked at why creditors sometimes prefer a debtor to enter a Debt Management Plan rather than an IVA particularly if debts could be repaid in full in a Debt Management Plan in ten years or less. Here are some further scenarios where a creditor might reject an IVA which on the face of it might appear to be an excellent proposal.
The first scenario where a creditor might reject an IVA goes back to the expectation of creditors that the debtor be open, frank and honest in disclosing all relevant matters for inclusion in the IVA proposal. Take a situation where 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. Assuming that the creditor’s awareness of such a matter is entirely legitimate based on prior business or personal dealings with the debtor, the Data Protection Act would not protect the debtor from the creditor disclosing the matter to the nominee. In any case, it is hardly surprising that the creditor would reject the IVA proposal in this scenario, without giving any reason.
A further scenario is 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 £. The creditor can expect to receive £100 of the debt to be repaid over five years. The administrative costs of providing a proof of debt and keeping the account open might not be worthwhile financially.
A third scenario is where the creditor has taken 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. The 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 relying on the charging order the creditor would not be permitted to vote for or against the IVA and if the IVA was 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 was rejected, the creditor could re-apply for a charging order after the meeting of creditors.
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 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, borrowing 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 behaviour such as excessive gambling, drinking or taking drugs and if the insolvency was due to such behaviour, creditors would have to be satisfied that such behaviour had ceased and that the debtor had taken reliable corrective action to sustain the changed behaviour, before accepting such an IVA.