Personal debt help in the North West & Yorkshire
How IVA Works
Since June 2002, the regulators have required insolvency
practitioners (lPs) to give this guidance leaflet to people thinking
about making an individual voluntary arrangement (IVA). It aims
to help you understand what is involved before you commit yourself.
2. The rules say that your P should not have charged you any money
in connection with an VA before you have read this leaflet and discussed
it with him or her. But in complex cases, perhaps when you own a
business, you might already have paid the P or his firm for professional
advice leading to a decision to consider an VA. So, after reading
this leaflet, you should sign the attached form and give it to the
P to confirm that he has complied with the rules. Even if you do
not meet the P in person, you should expect to meet a suitably experienced
colleague who can give good advice.
3. This leaflet has been prepared by the Association of Business
Recovery Professionals, also known as R3. It is not a full statement
of the law, nor can it cover all circumstances. Accordingly R3 accepts
no responsibility if you rely on this leaflet. You should always
seek appropriate professional advice.
4. An VA is an alternative to bankruptcy. Basically it is a contract
between you and your creditors. The terms of your proposal to creditors
may be very flexible, but creditors will reasonably expect their
prospects of recovering money to be at least as good as in a bankruptcy.
Further, they will expect the proposai to contain sanctions (such
as a right to bankrupt you) if you do not fulfil your part of the
bargain.
5. Your P is likely to help you with your proposal to creditors
and, initially, he is known as your ‘nomine& If the creditors
accept your proposal, an P then becomes the ‘supervisor’
of the arrangement.
6. Your proposal will be voted on by your creditors at a creditors’
meeting (except in the case of the ‘fast-track’ procedure
mentioned in paragraph 16). Generally, if over 75% by value of your
creditors who are represented at the meeting (in person or by proxy)
vote in favour, the VA will be implemented. Creditors may put forward
changes to the proposal, but they cannot impose them on you —
you can decide whether or not to accept them.
7. You are not legally required to attend the creditors’
meeting, but in practice you should be there. Otherwise it will
be impossible to agree any changes to the proposal. If last-minute
changes are proposed, you should feel free to ask for reasonable
time to think about them. If necessary, seek your P’s private
advice outside the meeting about what is being proposed.
8. An IVA gives you an opportunity to avoid bankruptcy. If it is
not approved, a creditor may bankrupt you. It follows that you should
put forward the best offer you can to your creditors. Be completely
open and honest with your P and the creditors about your financial
circumstances.
9. A bankruptcy order may be obtained by any creditor owed more
than £750, or you yourself may ask the court to make an order.
In either case, the Official Receiver, a government official, will
then contact you for details of your financial position. Subject
to certain exemptions, bankruptcy means that your assets are sold
and the money is used to pay your creditors as much as possible.
The assets will be sold by the Official Receiver or an IP, as your’trustee
in bankruptcy.
Assets you will be allowed to keep include:
ordinary household contents;
a modest motor vehicle;
the benefit of a residential tenancy;
‘tools of trade’ — things you need to pursue your
trade or vocation;
any money you have in a pension fund. However, you should seek advice
if the fund is large or if you are likely to be able to take the
benefits of the fund in the next few years.
10. There are special rules regarding your home. Generally speaking,
if you have equity in a house (i.e. it has a value in excess of
any mortgages on the property), even if it is jointly owned, it
may have to be sold. However, the trustee will be happy to discuss
how to avoid a forced sale of the property, for example by selling
your share to any joint owner or a friend or relative. The law encourages
a trustee not to take any steps to force a sale through the court
during the first 12 months of the bankruptcy, so you have a reasonable
time to make any necessary arrangements. In addition, the trustee
has three years from the date of the bankruptcy order to sell your
house or otherwise deal with your interest in it. If he does not
do so within that time, the property will revert to you. And if
the value of your equity is less than £1,000 the trustee will
not be able to sell it at all.
11. If you own a house with little equity, you or any joint owner
should consider seeking to buy out your share of the house from
the bankruptcy as soon as possible. Otherwise, movements in property
prices (or mortgage repayments) could produce an increased equity
later — even after your discharge from bankruptcy —
and the trustee could then seek full value for your interest. In
most cases the cost of buying your share should be no more than
the trustee’s valuation and conveyancing fees.
12. If you have surplus income above the needs of yourself and
your dependants, you will be expected to make contributions to your
creditors for up to three years, and may be ordered to do so by
the court. If you come into any money during the bankruptcy, such
as an inheritance or a lottery win, that too will be available to
your creditors.
13. In most cases the bankruptcy ends after one year, or even sooner
if the Official Receiver decides to close his file early.The slate
is then wiped clean and your creditors can make no further claims
against you. There are some exceptions. For example, you may still
have to pay any lump sum order made against you in divorce proceedings
and any unpaid court fines. Even if some of your assets remain unsold
after the end of your bankruptcy, they will still remain available
to your creditors and your trustee can still sell them. The existence
of the bankruptcy will also remain on record, e.g. at the Land Registry
and with credit reference agencies.
14. Bankruptcy has different consequences for different people.
A professionally qualified person such as a solicitor or accountant
may have his practising certificate suspended because of his bankruptcy,
and a bankrupt cannot act as a company director. People in such
a position are much more likely to seek an IVA. However, in other
cases an VA may have fewer advantages and bankruptcy might be a
better option for you. You should explore openly with your lP what
is the right thing to do in your case. Remember he can only advise
you properly if he knows all the facts.
15. You can put forward an VA proposal even after a bankruptcy
order has been made, with a view to ‘annulling’ (cancelling)
the bankruptcy at an early stage if the VA is accepted by your creditors.
However, you run the risk of going bankrupt again if for some reason
the VA is not successfully concluded.
16. Unless you are bankrupt when you make the proposal, only an
authorised P can act as nominee or supervisor of an VA. You can
expect to see a licensed professional with training and qualifications
demonstrating he is fit to hold an insolvency licence. Nearly always
the person who acts as nominee will also act as supervisor. The
P or his firm should not have had a material professional relationship
with you (e.g. acting as your accountant) before the VA, as he would
not then appear impartial. Alternatively, if you are bankrupt at
the time you put forward the proposal, the Official Receiver can
act as nominee and supervisor. In that case you may be able to take
advantage of a simplified procedure called a ‘fast-track’
VA, which does not involve a creditors’ meeting or allow creditors
to make any changes to the proposal. It still requires a 75% majority
by value of creditors to approve the proposal.
17. The IP’s role changes as the case goes on. Right now,
before you have committed yourself to anything, he is your professional
adviser, with responsibilities only to you. It is up to him to help
you make the right decision about what to do, and, if you proceed
with an VA, to help you put your proposal to your creditors.
18. When you decide to go ahead, the lP becomes the ‘nomine&
At this point the P’s role changes, and he has legal duties
to the court which may conflict with your interests. For example,
if he thinks your proposals are not fit to put before a creditors’
meeting, he is obliged to say this to the court, and the court may
end the VA procedure at that stage.
19. If the VA is approved,the P’s role changes again. He
is then the’supervisor’of the IVA,and his responsibilities
are mainly governed by the terms of the arrangement, but he still
has responsibilities to the court. His position now is to be’honest
broker’— to act even-handedly between you and your creditors
and to ensure that the terms of the proposal are fulfilled. If the
proposal requires him to bankrupt you if you fail to deliver your
part of the bargain — and creditors will probably insist on
such a term — then that is what the supervisor must do.
20. So it is important that you understand how the P’s role
changes as the case goes on. Don’t be afraid to ask questions
if you want clarification.
21. If you are dissatisfied, your P or his firm should have a formal
procedure for resolving complaints. You should ask for details of
this procedure and, first, raise the matter with the P or his firm.
Many complaints arise simply because of misunderstandings, and can
be resolved by both parties taking the time to go through the problem.
But if the matter cannot be resolved in this way, you can raise
it with your P’s regulator (he must tell you who this is —
there is a list at the end of this leaflet). His regulator will
then investigate the complaint on your behalf. The Insolvency Service,
a government agency, has a leaflet called ‘How to make a complaint
against an insolvency practitioners
22. You also have a right to raise any complaint about your supervisor
with the court, and the court may change any decision he has made.
You should seek independent advice before going to court, as the
court may order you to pay costs
23. The proposal is a formal legal document which, when approved,
becomes legally binding, and many points must be covered as a matter
of law or best practice. Other points will be included because creditors
tend to demand them. If such points were not covered, creditors
would be less likely to vote in favour.
24. Unfortunately this means the proposal itself may be a long,
technically complex document. Again, don’t be afraid to ask
questions. And you should certainly go through the proposal in as
much detail as you need to before signing it. It is the most important
document in the VA, and will govern everything that happens afterwards.
It is difficult, and sometimes impossible, to make changes later
on. Even though your P will probably help you draft the proposal,
it remains your proposal, and you could be prosecuted if it is misleading.
25. The proposal must contain details of what will be paid to the
P for acting as nominee and as supervisor. A separate fee is payable
for the P’s work in each of these roles.
26. The nominee’s work will include helping you with your
proposal, the necessary application(s) to court to start the VA
process, liaison with your creditors and holding the creditors’
meeting.The nominee’s fee will usually be a fixed sum, agreed
with you before he begins work on your proposal. Sometimes the fee
will be split between work done as nominee and work done before
that stage, as intended nominee.
27. The supervisor’s costs depend in part on the nature of
the proposal and what he needs to do to implement the arrangement.
In all cases he must report the results of the creditors’
meeting to you, the court and to all creditors. He must also issue
annual reports to these people. Sometimes he may have to do work
which was not foreseen in the proposal, for example if a creditor
takes a dispute to court, if a lot of work has to be done to agree
tax liabilities or if you break your proposal’s promises to
creditors. You can contact your supervisor at any time, and you
should do so if you have any problem delivering your part of the
bargain.
28. The supervisor’s fees may be stated as a fixed sum, as
a percentage of funds coming into the arrangement, or by reference
to the time costs of the supervisor and his staff. If the supervisor’s
fees are fixed on a time-cost basis, they will probably be stated
in the proposal as an estimate, rather than a binding quotation,
because no one can predict future events with certainty. However,
you will want to have details of the charge-out rates of the P and
his staff.
29. Make sure you understand what basis is being used for the fees
in your case, and that you are content with it. It is up to you
to fix the basis of the supervisor’s fees in the first instance
as this will form part of your proposal to creditors.The level of
the supervisor’s fees will also affect the return to your
creditors under the arrangement. If you are unsure of anything,
don’t hesitate to ask for clarification about the costs of
the process.
30. Both the nominee and supervisor can charge you for various
disbursements (additional expenses) that may be incurred while the
VA lasts, and they should give you details of any likely disbursements
in your case. For instance, there is a fixed fee for registering
an VA with the Department of Trade and Industry and the supervisor
is also required by law to take out a bond (insurance) for which
he pays a premium. Depending on the case, other charges may arise
such as legal or valuation fees. In particular, if the supervisor
needs to instruct solicitors in relation to any problem with your
arrangement, the legal fees will generally be paid out of the funds
in your arrangement. This includes any legal work that arises if
you don’t keep to the terms of your arrangement.
31. If the Official Receiver acts as your nominee, you will have
to pay a deposit to cover his fixed fee for acting as nominee and
registering the arrangement. He will also charge a fee for acting
as supervisor calculated as a percentage of the amount of money
received during the arrangement.
32. An VA can go wrong at any time. Your creditors may reject your
proposal at the first meeting, and you will be back to square one.
You should only consider an VA if you think major creditors are
likely to support your proposal. Your P can advise further and,
if necessary, discuss the matter first with the major creditors.
33. If the arrangement is approved, it could still fail later for
unexpected reasons. You might then still face bankruptcy in two
or three years. You should therefore take care not to agree to anything
that is not realistic and achievable.
34. Often people seek advice from others before being introduced
to an P. They may talk to a professional adviser such as a solicitor
or accountant, a banker, a citizens advice bureau, or a debt counsellor
or consultant. Some of these people reasonably expect to be paid
for their advice. Only you can decide whether you have received
value for money. If you are not certain, you should discuss it with
your IP. If your previous adviser recommended an VA, and has been
paid a fee, ask your IP to state in your proposal which organisation
gave that advice and how much you paid them.
35. Credit-rating agencies do not make much distinction between
a bankruptcy and an VA. Unpaid debts will affect your creditworthiness,
regardless of what legal process is used to deal with the problem.
However, if an VA is successfully concluded, that fact will be recorded
on any status report and may be more favourable from the point of
view of any future credit provider. It is your responsibility to
ensure your record is updated.
36. Your IP understands that this may be a distressing time for
you and has assisted many people in your situation before. His judgement
and experience can help to make sure you do the right thing from
now on. Here is a suggested agenda to discuss with the IP:
Your financial position
What creditors can realistically expect to be paid
Bankruptcy — pros and cons
VA — pros and cons
Likely creditor support
Are there other options?
Fees and costs
Agreed way forward
For more information about IVA please see:
IVA • IVA
FAQ • IVA Pros & Cons
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