If you’re planning on entering into an Individual Voluntary Arrangement (IVA) with your lenders you would naturally like to be in no doubt that they are going to approve your IVA offer. The overriding concern is whether your offer will be sufficiently attractive to a minimum of 75% of those lenders who make a decision to exercise their power to vote to persuade them to approve your proposals. Exactly what do creditors or to be more specific your particular creditors need to see in your proposal documents?
The first thing that that lenders look for in an IVA offer is the truth. They require the debtor to be open, frank and honest. After all it is their funds which is at risk and if a customer is trying to get their authorization to write off a considerable percentage (or indeed any part) of their debts via an IVA, the least they expect to read in the proposal is the truth, the whole truth and nothing but the plain unvarnished truth. So let us take this as a fundamental requirement and assume that the IVA proposal is an honest one.
Naturally, the IVA proposal should also be the insolvent debtor’s best endeavor to tackle their unsecured liabilities and the expected pay out to creditors ought to be reasonable. This yield is often called the estimated (or projected) dividend and is usually expressed as the percentage of the debts which the insolvent debtor promises to repay. To illustrate if the debtor estimates that lenders will get back a quarter of the funds taken out by the person in debt then the estimated return is 25% or 25 pence in the pound. It is for lenders to determine whether the dividend is acceptable or not. Lenders make this determination taking into account the debtor’s situation and they exercise their judgment as to whether the offer is the debtor’s best effort to sort out their debts.
Apart from the reliability of the offer and the expectation of a decent dividend, there are a variety of other criteria which creditors apply. Consider the case of a self employed (S/E) individual who is offering proposals to creditors for an IVA and who has liabilities to HM Revenue & Customs (HMRC). If the debtor has a reputation for non-compliance then HMRC are likely to reject the proposal. The commonest such non-compliance and in all probability the most significant one is the failure to make S/E returns to HMRC. If S/E returns are up to date, HMRC may well consent to the IVA proposal despite the fact that the debts to HMRC are considerable, so long as returns are up to date. The way in which HMRC looks at this issue is that the cost of making S/E returns is frequently small and even if the debtor is not able to make full tax and associated payments once they fall due, the failure to make returns implies a lack of goodwill and prospective future issues if the IVA were to be accepted.
HMRC also puts great store in the standard of treating all unsecured creditors the same. They particularly do not like an IVA proposal in which what’s sometimes referred to as a hostage creditor attempts to be looked after more beneficially than other lenders. For an S/E person, a hostage creditor might, by way of example, be a vital seller of products and/or services to the debtor’s company and who will only carry on doing business with the person in debt if they are omitted from the debtor’s IVA and if they are given payment in full for all liabilities incurred by the debtor ahead of the IVA being authorised. This is needless to say preferential treatment for that creditor who is holding the person in debt hostage. From the debtor’s standpoint, it’s an instance of damned if I do and damned if I don’t! If they include the hostage creditor’s debt in the IVA, that creditor will probably stop providing crucial products or services and the debtor’s enterprise may not succeed for that reason which in turn could cause the IVA to fail. If alternatively the borrower does not disclose the debt to the hostage creditor and excludes it from the IVA, fully aiming to service that liability covertly, than again the IVA may be unsuccessful when and if the supervisor of the IVA or another creditor uncovers the preferential treatment. In these scenarios the debtor’s business is also likely to fail. This sort of debtor could hardly be characterized as being open, frank and honest.
Creditors might also reject an IVA if it’s quite likely that in a Debt Management Plan (DMP), all lenders could be settled in full in less than ten years and in some instances in a period of one hundred months. Although such an outcome could rely upon some or all interest and penalties being frozen during the life of the DMP, that’s certainly not guaranteed, given the differing strategies that different creditors adopt when engaging with a DMP.
The business relationship between the lender and the person in debt can also be a major aspect in forming the creditor’s attitude to the IVA offer. If the consumer is a relatively recent client and the liability was sustained within the previous six months, it would not be surprising for the creditor to turn down the IVA. Conversely if the debtor was a long standing client of say twenty years and the new liability was only a consolidation of various already present liabilities with that lender, then it would be less likely that that creditor would turn down the IVA, given the long term knowledge of the debtor’s credit history.
The main other factors that can have an effect on the thinking of creditors to an IVA offer are the past conduct of the debtor, the viability of the IVA, the charging of property and the former (and present-day) lifestyle of the borrower. Let’s explore these in turn.
Creditors expect to see that the debtor will be open, candid and honest in disclosing all pertinent factors in the IVA offer. If a creditor is aware of a significant matter relating to the debtor’s former credit history and applicable to the debtor’s present monetary troubles and the matter is not disclosed in the IVA proposal then that lender would be strongly prepared to disclose the matter to the nominee, assuming that the creditor’s understanding of the matter is entirely legitimate and is based on past business or personal dealings with the debtor. The Data Protection Act would not protect the person in debt from such disclosure. At any rate, it would not come as a surprise that that lender would reject the IVA offer, even while not supplying any cause.
Creditors will also exercise their judgment and discretion where the projected dividend is so low that it is not fiscally viable for the lender to agree to the IVA. Suppose as an example that the debt was £500 and the predicted dividend in a five years IVA is 20p in the £. Although the creditor could expect to get a dividend of £100 over a duration of five years, the management costs of furnishing a proof of debt and holding the account open could be excessive and not beneficial financially. Such a lender might turn down the IVA offer.
A further situation which occurs is where the creditor has already taken legal steps to guarantee the debt by obtaining a charging order against the debtor’s property. Suppose that a creditor has already obtained an interim charging order whenever the debtor’s IVA proposal is delivered. That lender has two choices. The first choice is to go on to get a final charging order and depend on that for the satisfaction of the liability in hopes that the IVA will be declined so that the charging order can be made absolute. If the creditor were to rely on the charging order, then that lender would not be allowed to vote for or against the IVA and if the IVA were to be authorized ,, the charging order would not be granted by the court and the creditor could claim as an unsecured creditor in the IVA, receiving the same dividend as the other unsecured creditors. The other choice available is for the creditor to give up their security and hand in an unsecured debt claim in the IVA and so be permitted to vote for or against the proposal. In the event the IVA proposal were to be turned down, the lender could re-apply for a charging order once the meeting of creditors is ended.
The last situation is when the chosen lifestyle of the borrower leads a creditor to conclude that an IVA would be very likely to be a failure in supervision. Lenders may explore how liabilities were accrued from the outset. If the borrower engaged in a opulent but unsustainable way of living over a duration of time seemingly not caring whether such lifestyle debts could be paid back or worse, borrowed recklessly knowing that the debts could not be repaid in any sensible period of time, then lenders would be predisposed to reject such a proposal. If the debtor’s lifestyle involved long term obsessive behaviour such as excessive wagering, alcohol consumption or taking narcotics and if the financial distress appeared to be as a consequence of such conduct, lenders would need to be satisfied that such behaviour had ceased and that the consumer had taken reputable corrective steps to retain the transformed behavior, in advance of accepting this type of IVA.