Recent Trends: Individual Voluntary Arrangements
The total number of individual insolvencies increased in the first and second quarters of 2018, reaching the highest level since 2012. Individual Voluntary Arrangements ("IVA") comprised the majority of individual insolvencies, accounting for just over 60% of the total, a much higher proportion than the period prior to 2004 (less than 25%).
The trend suggests that the IVA is increasingly the preferred option for debtors, who voluntarily agree to repay creditors a proportion of what they owe their creditors over a fixed period and once paid, it represents the full and final settlement of their debts. It is not surprising that this increase in IVAs has led to a significant administrative burden on local authorities, who are asked to consider an increasing number of IVA proposals from their constituents.
An IVA is supervised by a licensed insolvency practitioner and once approved by creditors who hold 75% or more of the total value of the debt, the arrangement is binding on all of the debtor's creditors. Whilst it may not seem initially attractive to accept a reduced repayment, the law says that an IVA should only be proposed if it is likely to result in a better return to the creditors than bankruptcy. However an IVA proposal will include future promises to do something, including for example, making contributions from income received or selling something (say, their home) and sometimes those promises are broken or the anticipated sale earns less than expected So the local authority needs to review the proposal pragmatically and conclude whether or not it may be sensible to accept a reduced amount and so, vote in favour of the proposal The IVA also has an inherent advantage: professional fees will be less when compared with the bankruptcy process, potentially meaning additional funds could be paid into the IVA.
A creditor can of course reject the IVA proposal but, before doing so, it is worth considering whether it is possible to negotiate certain modifications to make the arrangement more attractive and beneficial to them. For instance, a local authority could request that a term is included regarding payment of future council tax liabilities and that failure to settle these will constitute a breach of the IVA, or request a minimum dividend payment, for example because the debtor's estimated expenditure (usually the household budget) could be less, say they have a full Sky TV package, when actually they could get by on less! As a matter of routine review, we would suggest that the following modifications are considered by local authorities if they are not already contained within an IVA proposal:
- That the debtor will settle all future Council Tax/National Non-Domestic Rates that fall due promptly. Should any amount be overdue for more than sixty days this will constitute a breach of the terms of the IVA and the Supervisor shall be obliged to issue a Notice of Breach.
- Failure to comply with any express term of the arrangement that is not remedied within thirty days shall constitute a breach of the debtor’s obligations under the IVA. The Supervisor shall be obliged to issue a Notice of Breach.
- Should a Notice of Breach not be remedied, it will be considered a breach that cannot be remedied, and the Supervisor shall petition for a bankruptcy order against the debtor.
- The debtor shall not, within twelve months of approval propose a variation to the arrangementthat will reduce the yield to creditors below the forecast dividend, unless the Supervisor can provide clear evidence that the variation proposal results from changed trading or personal circumstances that could not have been foreseen when the arrangement was approved.
- The IVA Supervisor should conduct a full review every 12 months of the debtor's income and expenditure and obtain an increase in voluntary contributions of not less than 50% of any rise in the debtor's net income after provision for tax and NIC.
We would also recommend that the Supervisor/Nominees fee is considered, as it should be fixed to protect and maximise the anticipated dividend for creditors. Each proposal should be taken on its own merits and should not be too onerous that the individual is not able to comply with the proposal, or return to financial stability. That said, in general, the longer the IVA period the greater the chance it will fail.
Whilst the above list is not an exhaustive, these types of modifications are intended to provide an example of how a local authority can set out clear obligations on the debtor and ensure that their position is protected once the IVA takes effect.
The Business Support and Insolvency Team at Blake Morgan LLP have extensive experience advising local authorities surrounding their options in IVA proposals. If you have any questions, or if you would like Blake Morgan to review any specific IVA proposals, we would be happy to assist you. Please contact Paul Caldicott.