Written ByKeith Steven
Managing Director
Keith is the Managing Director of KSA Group Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
An individual voluntary arrangement is a formal deal between the individual (debtor) and his or her creditors. If the individual is in debt and can’t pay payments when they fall due, he or she is insolvent. An IVA can protect debtors against legal actions while a suitable repayment plan is put in place. See the three tests for insolvency here.
An IVA can also help if the business is struggling with cashflow and creditors cannot be paid on time. Having an opportunity to pay back debt in a realistic time-frame lets the individual concentrate on running the business and is infinitely better than bankruptcy
If the individual’s business is a sole tradership or partnership and it is viable, an IVA is the best option for the business to continue. If there are any disposable assets, these can be sold (often at a better value) in an IVA to cover debt that is owed.
If the business isn’t viable, it should be closed as soon as possible and bankruptcy initiated. Occasionally where the business is closed, a deal between the individual and the creditors can be reached but this would usually mean disposal and liquidation of assets.
View our IVA flowchart for a step-by-step guide to the process.
When running a small business, partners can often struggle financially for a number of reasons. The business could be under capitalised or it may be difficult to get suitable finance. If large contracts are lost, this can be put immense pressure on cashflow.
Once things start to get out of control, it can be a lot harder to manage and run the business because there is so much ‘firefighting’ to do. By this, we mean time spent dealing with creditors and resolving problems rather than concentrating on strategies and improving profits. This can often lead to further problems putting the business at risk of closing. In the event of insolvency, partners can be made personally liable for the partnership’s debt. This can lead to bankruptcy of the individuals involved.
As mentioned above, an IVA is a deal between the individual in debt and the creditor and usually lasts between three and five years. The arrangement can protect the debtor against legal actions and allow him or her to pay back debt from future profits.
In summary, the debtor will repay what is affordable in say 5 years – this may be less than all of the debt.
If you have any further questions please see our IVA FAQs and the IVA flowchart.
If you would like to go into an IVA, the first thing you should do is put together a list of all of your creditors, both current and future ones.
You then need to make a list of all your assets and their values. If you aren’t sure how much they are worth, give estimates by comparing similar assets or goods online or in brochures etc. Don’t worry too much about getting professional valuations.
It’s vital you review all aspects of the business to see whether it is viable going forward. Our marketing guide may help you with this. Would you consider a restructure and is there enough business to be profitable?
If problems can be resolved and there is a chance for the business to be viable, an IVA is worth considering. If you would like more information about IVAs, you can contact us on 0800 9700539. We can discuss all of the above referring to your specific situation, free of charge.
If the IVA is to go ahead, you will need to appoint a nominee (usually a licensed insolvency practitioner) to handle your case. An advisor can help prepare a proposal, deal with creditors and assist you with collecting all the information you need to go forward, however you will need a nominee too as legalities require a licensed insolvency practitioner to represent a case.
The nominee will review proposals and ensure creditors’ interests are maximised before putting it to the court and creditors.
It’s best to seek insolvency advice when writing the proposal as the legal process is often complicated – turnaround practitioners can prepare the proposal on your behalf if they have all the right information.
It’s then the insolvency practitioner’s job to put forward the proposal at court. Whether you write the proposal yourself or have outside help, it’s important to include realistic costs and cashflow figures without estimating large increases or future profits. Also, remember you are not out of the woods just yet and the next year will probably be tough.
Ensure you don’t commit to making large payments, we usually do not recommend you pay out more than £12,000 in the first year. Repayments must of course, be affordable.
In the proposal, there should be details of the current financial situation and how the business became insolvent, known as a statement of affairs (SOFA). This statement should also include the outcomes of an IVA if it was successful. There should also be an outline of the arrangement’s structure, with information showing how creditors will be repaid and how much they will receive over the number of years.
The proposal and SOFA will then be filed at court, allowing a formal interim order to be applied. This will protect the individual from the time the proposal is filed to the day of the creditor’s meeting. Essentially, it means creditors cannot issue any legal action, like bankruptcy, without getting permission from the court. All actions by bailiffs or sheriffs are stayed (frozen).
There are two methods: the first is to apply or make an application for an interim order prior to the proposal being completed. The second is to use a method called a concertina application, which means the application for the interim order and the filing of the proposal takes place at same time. This is often the most efficient and cost-effective method.
Once the proposal is sent to every creditor, a creditors meeting will be called. The meeting can only be held from 14 days after the proposal has been received by creditors (date of the receipt). This gives creditors time to make amendments and put forward any objections.
Nowadays there is generally no actual creditors meeting it is usually deemed consent or a virtual (telephone) meeting. Before or at the virtual meeting, creditors can question the proposal, the debtor and the chairman (who is typically the nominee) about the contents of the proposal. It is also possible for them to modify the proposal as they see fit. Provided that a majority of 75% of the creditors agree with the modifications these can be adopted into the document and become part of the proposal going forward.
Modifications typically include ensuring that the debtor and his partners IVA repays the amount agreed but also pays all future debts on time such as the tax due and VAT. Where a creditor makes a modification that is onerous or would not be in the interest of the debtors or the other creditors it would be rejected by the chairman unless sufficient majority are in favour of this. Ultimately the debtor can decide not to go ahead with the IVA, but to use bankruptcy. This is rare but is possible.
Voting is an area that raises lots of concerns and questions from debtors to ourselves and one which is often confusing. Usually creditors send their votes to the IVA nominee in advance of the decision making process (creditors meeting).
Put simply, provided a majority of creditors over three-quarters votes to support the proposal as discussed, proposed and modified then the proposal is accepted.
All the debt of the creditors is added up and each creditor has a vote according to the amount of money he or she is due by or from the debtor. Please see the example below:
| Total PAYE debt | £5,000.00 | |||
| Total VAT debt | £2,000.00 | |||
| Total Unsecured Creditors | £37,800.00 | |||
| Total Debt in IVA proposal | £44,800.00 | |||
| Present at Creditors Meeting | ||||
| PAYE | £5,000.00 | |||
| VAT | £2,000.00 | |||
| Unsecured creditors | £19,500.00 | |||
| Total votes cast | £26,500.00 | |||
| In Favour | £25,123.00 | |||
| Reject | £1,377.00 | |||
| Total %age in Favour | 94.80% | |||
| Total %age Rejecting | 5.20% | |||
| Proposal accepted | Yes | |||
As shown in the example, over 94.8% of the creditors voted in favour and 5.2% of the creditors voted against. However, only 59% of the total creditors voted. This vote is sufficient to bind all creditors legally.
“Being bound” means that the creditor may not take legal action to recover the debts due to the creditor: whether they supported the proposal or not. However, and this is important, all future debts must be paid to normal terms.
It is possible for the creditors to replace the nominated supervisor with another insolvency practitioner. Again this is rare but does happen on occasion. Therefore typically the nominee will want his fees paid before this creditors meeting!
After the voting has concluded, the chairman will typically close the meeting by saying that the proposal has been agreed and that all creditors will be sent any modifications and a chairman’s report. This document is filed at court and the interim order is removed usually within a week or two of the creditors meeting.
Assuming that the supervisor is appointed by the creditors, his or her job is to supervise the deal between the creditors and debtors. Provided the debtor is making monthly, quarterly or periodic payments as agreed and all information requested by the supervisor is provided, then he or she will take no further action. Their job consists of reporting the information to the creditors over the period of the IVA and also making payments in order of priority.
The deal will propose that a certain amount of money is paid into a trust account held by the supervisor over a period of time to be agreed. If for example you agree to pay £5,000 a year for the next five years, £25,000 will be paid in.
At the end of each year, payments will be made to the creditors who have proved their debts to his/her satisfaction and in order of priority. To understand the order of priority see creditors ladder guide.
If you’re interested in the IVA route, call us on 08009700539 for initial free advice and one of our corporate advisors can talk through the process.
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Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership. These questions and answers will give more detailed background to the Administrative Receivership technique. If you have any further general or specific questions email us or complete the contact form. Q: How does it happen? A: Receivership can happen very quickly once the bank loses faith in the directors. The best policy is to work with the bank and produce a survival plan having taken professional and expert advice. Q: But the bank can't just appoint a receiver can they? A: Yes - read the terms of the debenture closely - you will be surprised how little power you have to prevent it. In truth the bank will generally have exhausted all possible avenues to help to try to preserve the business. If the directors are manifestly not up to the job or will not listen, will not take professional advice, they will lose patience quickly. Q: Can we stop them? A: Not normally. However if you talk to an experienced turnaround practitioner they can often persuade the bank that their involvement will lead to a review of viability followed by a professional recovery plan and the bank will usually give time for this to happen (within strict financial constraints) Q: How can we avoid receivership? A: Follow the guidance on this site. Discuss the problems with your key people. What caused them and how you can get round them. Build a plan for survival. Discuss this clearly with the bank. If in doubt about the correct route speak to a turnaround practitioner or a quality insolvency practitioner who lists rescue and recovery as a specialty. Be warned most are still looking for liquidations and receiverships (undertakers)If the bank wants to put investigating accountants in; wait until you have a built workable plan and then sell this HARD - to the investigating accountant.Above all demonstrate a professional and determined approach to saving a viable business - procrastinate at your peril - the bank will not wait for that silver lining. Q: I have heard that receivership is a rescue procedure - please explain? A: Many insolvency practitioners describe selling the business or its assets to a third party out of receivership as a rescue technique. Although some part of the activity may remain I cannot understand how the loss of almost all creditors' monies, jobs and all shareholders' funds, followed by the liquidation of the company, can be described as a rescue! Q: What happens if the receiver does not get the banks money back in full? A: He/she may rely upon the banks other securities. Obviously if the directors, shareholders or even a third party has signed a personal guarantee to pay money to the bank in the event of a failure to recover its loans, then the receiver pursues this as if it were an asset of the company. The receiver may also look at the possibility of legal actions against the officers of the company or debtors or creditors to recover funds Q: What happens to my personal guarantees in receivership? A: Unless the receiver recovers all loans due the bank after his/her fees (and any payments due to preferential creditors) then your PG will crystallise. In other words the receiver may seek to recover money from you. Q: What happens to the employees? A: This is a complex question that cannot be answered without a great deal of information. If the business is sold in a reasonable time then their employment rights can be continued with the new owners (under TUPE). 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