The most obvious reasons why creditors reject some proposals for IVAs include (in the case of HMRC) non-compliance by the debtor (such as recurrent failures to make S/E returns); preferential treatment by the debtor of some creditors to the detriment of other creditors; recent debts incurred by the debtor with a relatively new creditor; the likelihood of substantially higher returns for creditors if the debtor was to enter a DMP rather than an IVA, particularly if debts could be repaid in full in a DMP in ten years or less. There are some less obvious reasons.
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. Such a creditor would be likely to reject the IVA proposal without giving any reason even if that creditor felt constrained from divulging details of the debtor’s financial history.
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 that £100 of the debt would 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 the creditor were to rely on the charging order, that creditor would not be permitted to vote for or against the IVA. If the IVA were to be approved the charging order would not be granted and the creditor could only claim as an unsecured creditor in the IVA and would only receive the same dividend as the other unsecured creditors. The second choice available is for the creditor to give up their security (drop the application for a final charging order) and submit an unsecured debt claim in the IVA. This would allow the creditor to vote for or against the proposal. If the IVA proposal was rejected at the Meeting of Creditors, the creditor could then re-apply for a charging order.
A final scenario is where the lifestyle of the debtor is known by a creditor to be excessive leading the creditor to the conclusion 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 debts accrued 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 drug taking and if the debtor’s insolvency was likely to be 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.