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 made between an individual (who is in debt) and the lender or business. Often a sole trader can use an IVA to help reorganise debt and restructure the business.
If, as a sole trader, you can’t pay tax payments when they fall due, the business is insolvent or under financial pressure. An IVA could be the best solution.
An IVA allows the sole trader to make debt repayments on a regular basis over a number of years, helping combat his or her debt problems in a realistic way which they can afford to pay. It is more beneficial to creditors than other methods, like bankruptcy, as debt will be repaid over time. With bankruptcy, creditors might receive nothing. Think of it this way; if you are owed money by someone and they ask for time to pay it, wouldn’t you probably agree? Now, if they said that they had a problem and they want to pay you say 25p in the £1 or they will have to go bankrupt and you would get 0p in the £1, which one would you agree to?
Yes, if your business is viable or you have disposable assets that can be turned into cash, you can enter an IVA.
If the business has never made profit and sales aren’t increasing enough to cover overheads, an IVA is not suitable as the business isn’t viable. You should close it as soon as possible and start bankruptcy proceedings. You may be able to arrange a deal with creditors if assets can be sold or liquidated to recover debt for creditors.
See our flowchart of the IVA process.
When a business is struggling, it can be difficult for sole traders as it is the individual who is liable for the business debt, much like partners in a partnership. If problems aren’t dealt with straight away, debt can build up and there is a real risk of bankruptcy.
For most small businesses, it is not uncommon to suffer from undercapitalisation and lack of finance. Often, there will be only be a few big contracts and if one is suddenly lost, this can put huge financial pressure on the business. Once cashflow begins to suffer, the problems are harder to manage and more time will be spent with worried creditors, giving you less time to focus on marketing, sales and general running of the business.
If this sounds familiar, you need any more information, or specific questions answered about IVAs, contact us on 0800 9700 539. We can talk you through, free of charge.
If you wish to go into an IVA, you’ll need to prepare some information first, including a list of ALL of your creditors and a list of all of your assets (with estimated values). Ensure you provide estimates of the debt you owe to each creditor – this information will be used in the IVA proposal.
For an IVA, you will need to appoint an advisor or a nominee to prepare the proposal. They will deal with all creditors and collect all necessary information to go forward. In essence, the nominee will take all creditor pressure away which can be a huge relief to clients.
If you employ an advisor, you will eventually also need a nominee (nominated supervisor) as you need a licensed insolvency practitioner to present the proposal at court. He or she will review the proposal and if satisfied, will act on behalf of the sole trader and file it at court as well as send it to creditors.
While you can write the proposal yourself, it is best to seek advice and assistance from insolvency advisors as there are complex legal processes involved. The final proposal must show realistic cashflow, sales and cost figures with no high expectations of future sales or contracts. Problems won’t be solved immediately so expect a tough year ahead. Don’t make any promises you can’t keep and don’t make large payment, this could backfire and put you in a worse position. Remember, it’s a marathon, not a sprint.
Along with the above, the proposal will need to include reasons why the business is insolvent and how creditors will be repaid as well as how much. Creditors will need to see a statement of affairs (known as SOFA) within the proposal to help them make a decision. This document includes all financial information and figures, giving an accurate account of the business’s position. The SOFA would also include details on the expected outcome of an IVA compared to other options, like bankruptcy.
Once everything is prepared, the proposal can be filed at court. It will be circulated among creditors at the same time a moratorium is applied. This protects the sole trader against legal actions during the process up until the creditors’ meeting (which takes place a minimum period of 14 days after the proposal has been posted to creditors.
The moratorium or interim order can be applied before the proposal is completed or at the same time the proposal is filed (known as concertina application). The latter is often the most efficient method.
As mentioned above, creditors have 14 days to consider the proposal and to put forward any objections or concerns before the creditors’ meeting. At this meeting, the proposal can be questioned and modified as the nominee and creditors see fit.
An IVA can only go ahead if over 75% of creditors (by value) accept the proposals by vote or proxy. Debt of the creditors is added up and each creditor has a vote according to the amount of money he or she is due 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 | |||
Note that creditors can appoint a different insolvency practitioner to the one nominated by the sole trader if they wish. This rarely happens but it is why nominees usually ask for payment before the creditors meeting.
Once voting has come to an end, the nominee will state that the proposal has been agreed (if majority vote for) and all modifications and reports will be sent to creditors. The document is filed at court and the interim order is lifted (usually one or two weeks after the meeting).
It is then up to the nominee to supervise the arrangement between the creditors and sole trader over the term of agreed years. Information must be reported to the creditors during the IVA and payments will be made accordingly.
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.
We hope that this guide has been useful for you and that it answers a lot of questions. IVAs are very simple tools in principle but with every case being different we cannot give answers to all questions in this guide. So, please feel free to call us now on 0800 9700539 or e-mail us at info@ksagroup.co.uk to answer your specific business or personal debt problems. We are happy to help and will not charge for this advice.
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What Does Going Into Administration Mean?
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What is Receivership?
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Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control. When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. 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). If the receiver makes them redundant straight away they can claim for payments from the government (subject to a maximum amount). Again this is a complex question - email us if you want more detail.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.
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