Insolvency and Business Support experts Paul Caldicott and Roisin Gallop look at the impact of COVID-19 on Individual Voluntary Agreements (IVA's). This article was first published by the Institute Of Revenues Rating & Valuation Insights November 2020 edition.
IVA's and the process
Governed by Part VIII sections 252 to 263 of the Insolvency Act 1986 an Individual Voluntary Arrangement (“IVA”) is a formal procedure tailored to a debtor’s individual circumstances. Many turn to an IVA as a debt solution due to its relatively flexible nature and as an alternative to bankruptcy or other more in-flexible methods to manage their debts.
An IVA is a legally binding repayment arrangement between creditors and the debtor which allows contributions to be made by the debtor which are achievable and affordable. Generally, an IVA proposal will offer repayment of a certain percentage of the full debt owed, which must amount to more than a formal bankruptcy would pay. If accepted, the debtor is only required to repay the agreed sum. On successful completion of the IVA, the remaining debt is written off. This is one of the benefits of an IVA.
Another benefit of entering into an IVA is the protection it affords the debtor; during the term of the IVA the creditors should not make contact which can be a huge relief, since a debtor may have been receiving constant ‘final demand’ notices and calls from various creditors. Generally this takes the day to day stress debtors face away from them whilst allowing to make achievable and realistic repayments.
An IVA must be proposed and managed with the assistance of a licensed Insolvency Practitioner who will take the role of ‘nominee’. If there are any changes or modifications required to the terms throughout the term of the IVA, these must first be proposed to the creditors for consideration and approval.
Whilst there is no minimum debt limit to enter into an IVA, generally IVA’s become a viable option for debtors with over £10,000 of unsecured debt owed to two or more creditors. Once the nominee has undertaken a thorough financial assessment of the debtor and an arrangement is drafted, the nominee will lodge the proposal at Court ahead of a Creditors meeting.
Creditors must have at least 14 days’ notice of the meeting where they will attend and vote as to whether they accept or reject the proposal. The IVA does not become legally binding until the creditors have voted in favour. There must be a 75% majority vote of the creditors (measured by value of debt) for the arrangement to become binding on all creditors.
If creditors are prepared to vote to accept the proposal but first require additional terms or amended clauses, the creditors can draft modifications which if accepted by the debtor the IVA is considered accepted and becomes legally binding. The modifications are formally implemented into the original proposal and the two documents must be read in conjunction with the other. Once accepted, the IVA is then recorded on the IVA register where it remains for the duration of the arrangement.
Once approved, the Insolvency Practitioner acting as nominee then takes the role of the IVA supervisor, ensuring the terms of the IVA are upheld by the debtor throughout the term of the arrangement. The supervisor will ensure that payments made by the debtor are distributed on a pro-rata basis to the creditors.
On successful completion of any IVA, the supervisor will notify all creditors and provide the debtor with a notice of completion. Credit agencies will also be notified so the debtors’ credit file is updated. However, if a term of the IVA is breached and the debtor fails to comply, the supervisor will issue a Notice of Breach which will afford the debtor a further period of time, usually 14 days, to remedy the breach. If this breach is not remedied the Supervisor must act in the interests of the Creditors who have debt outstanding and if so obliged, are generally required to petition for the bankruptcy of the debtor. In this instance, the full amount of debt becomes due and owing rather than the compromised sum that was agreed at the outset of the IVA. The debtor will have lost the benefit of repaying a reduced amount.
Are IVA's increasing in popularity?
IVA’s have become more and more popular in recent years. There was a 9.8% increase in IVAs on the previous year to 77,982 in 2019 which was the highest level recorded since IVA’s were introduced in 1987. Further, IVA’s accounted for 63.8% of all insolvencies in 2019 in contrast to 2010 when only 37.5% of all insolvencies were IVA’s.
2020’s statistics unsurprisingly show a fluctuation as the long term impact of Covid-19 unfolds across the UK. The true impact of Covid-19 will likely not be accurately measurable until at least quarter 4 of 2020 leading into 2021. At the beginning of the pandemic it was considered that individual insolvencies initially fell as a result of the reduced running of the Court system. Alongside this, many individuals at risk of serious financial decline would have been kept afloat for longer than may have ordinarily been anticipated as they may have qualified for Government financial support for individuals such as the furlough scheme and landlords unable to recover unpaid rent.
It is anticipated that Covid-19 will cause more individual insolvencies than average in the upcoming months when the furlough scheme ends at the end of October 2020 and other Government financial support comes to an end. It is estimated that more individuals than ever will enter into an IVA in the first half of 2021. Although accurate statistics over a measurable period have not yet been produced, in June 2020 alone, 8428 IVA’s were registered which represents a 33% increase when compared with the average of each of the three months ending in June 2019 which indicates potentially the beginning of the increase we are likely to see.
Aside from the risk of a second National lockdown, another factor to consider is the likelihood of future ‘local lockdown’s’ and the impact these may have on individuals in certain areas of the country. If one area is subject to a local lockdown for a sustained period this would inevitably have a knock on effect on businesses in that area and potentially there may be some unable to weather the further storm leading to greater redundancies and unemployment in pockets of the country.
COVID-19 impact on ongoing and new IVA's
In light of the pandemic, the Government took steps to issue new guidelines (“COVID-19 Guidance for the Straightforward Consumer IVA protocol”) to help those subject to IVA’s or considering entering into one. For those with IVA’s and who can demonstrate they have been negatively impacted financially as a result of COVID-19 immediate relief was made available by way of a three month payment holiday and/or a 25% reduction in the IVA repayment level. This can be done without the usual recourse to a meeting of the creditors, whose approval is not required in these unique circumstances. The guidelines are in place at least until April 2021.
StepChange are a debt advice charity who provide advice to debtors or struggling individuals for free. They can assist with informal debt advice such as assisting with debts, income and expenditure or more formal advice in respect of debt management plans, equity release, IVA's and other areas.
How can StepChange help?
StepChange are offering tailored advice in light of the current Covid-19 pandemic including assisting with helping debtors to apply for various forms of financial relief from the Government or providing general advice to individuals concerned how the pandemic has impacted their finances.
StepChange are an excellent first port of call for individuals considering their options going forward and a good source of information for all routes to resolve debt issues.
As Covid-19 and the uncertainty that comes alongside it continues to impact individuals and businesses over the coming months, redundancies and/or financial hardship will be widespread across the Country. In these circumstances it is expected the personal insolvencies will be on the rise and that more people than ever before will be considering their options including the use of IVA’s.
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