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As part of our service to our lenders, we undertake recovery action and legal enforcement on defaulted loan accounts. This is done on your behalf with the intention of recovering your funds. At certain times during this recovery process, we endeavour to give lenders a role to shape our recovery action and have their say in the acceptance or rejection of any repayment offers we may receive. Such occasions include the submission of an Individual Voluntary Arrangement (IVA) or Company Voluntary Arrangement (CVA). This blog post will look a little closer at both instruments and discuss what lenders may want to look for in assessing whether those arrangements may be in their interests.

Voluntary Arrangements – A Brief Introduction

Generally speaking, a Voluntary Arrangement is an agreement between a debtor and their creditors for the repayment of all or part of their debts. The Agreements are managed by the debtor’s Insolvency Practitioner, who becomes the Arrangement ‘Supervisor’. Payments ‘into’ the Voluntary Arrangement are held by the Supervisor to be distributed among creditors. Voluntary Arrangements can be either Individual or Company, depending on whether the debtor is an individual or a company.

Company Voluntary Arrangements

A Company Voluntary Arrangement (CVA) is an arrangement between a limited company or LLP and creditors of that company. This Arrangement will be proposed with the acceptance of all of the directors of a company and will be drafted by an Insolvency Practitioner instructed by the company. The directors of the company will believe that the company can still remain viable, but, at the moment, the company will lack the ability to pay all of their current debts on time Although a company proposing a CVA will be insolvent, it is important to note that the company will not be in administration or liquidation, and as such the current directors will remain in full control of the day-to-day running of the company and its finances.

Individual Voluntary Arrangements

An Individual Voluntary Arrangement (IVA) is an arrangement between an individual debtor and their personal creditors. This was introduced by Part VIII of the Insolvency Act 1986 and, if passed, is binding upon all of his/her creditors. In order to be passed, the Act requires there to be a 75% majority of creditors voting in favour of the IVA. Once the IVA has been approved, it will bind all creditors who were entitled to receive notice of the decision procedure, whether or not they received notice or whether or not they chose to vote. The proposal will be drafted by an Insolvency Practitioner (IP) who will be approached by the debtor and asked to assess their financial situation to determine the most appropriate solution to the debtor’s financial difficulties. They will become the debtor’s Nominee and will assist in the preparation of the IVA Proposal. If the IVA is approved, the IP will become the Supervisor of the IVA. In the role of Nominee and Supervisor, the IP has a duty to act in a manner which is fair to both the debtor and creditors. An IVA can be proposed either as an alternative to, or a potential exit from, a Bankruptcy Order. Debtors will usually propose an IVA as an alternative option provided to creditors in the event of ongoing insolvency and bankruptcy proceedings. It can often be more favourable for a creditor to avoid being declared bankrupt to avoid being subject to the penalties involved with bankruptcy (such as limitations on access to credit, prevention of standing as a director or taking approved positions). Less commonly, an IVA may be considered by an individual who has already been declared bankrupt as a potential exit from bankruptcy. In these cases, the IVA Proposal should provide that the Bankruptcy Order be annulled.

The Proposal

The proposal is the key document in any voluntary arrangement. The proposal must name a person as the intended nominee; such a person may be a qualified insolvency practitioner or other authorised person and must be willing to supervise the implementation of the arrangement. The proposal should: 1)      explain why the debtor considers that the voluntary arrangement is desirable; 2)      give reasons why creditors may be expected to concur with the arrangement; and 3)      provide details of the debtor’s assets and liabilities. In order to make it likely that the creditors will accept the proposal, it should be credible and provide an acceptable alternative to bankruptcy. The proposal should set out clearly the debtor’s obligations particularly as to the time and amount of contributions, so that there is no dispute over whether s/he has complied with the terms of the arrangement. It is important that the proposal sets out a time scale for its achievement. Considerations for Lenders – What to Look for in a Proposal? Below are a list of a few considerations which lenders may want to look for when assessing a Proposal for the first time. One general consideration is the other number of creditors. CVA When assessing a CVA document, lenders should ask themselves the following questions: 1)      whether the estimate of future trading and profitability are realistic for that particular business 2)      whether the company is likely to be able to afford the contributions 3)      what are the reasons which led to the business becoming insolvent 4)      what changes will be implemented in the company’s management and trading practice 5)      what professional advice the board will receive to secure a successful recovery. IVA Similarly, when assessing an IVA document, the following considerations should be considered: 1)      where are the contributions coming into the IVA from 2)      are they coming from a source which would also be available to a Trustee in Bankruptcy should the debtor be made bankrupt e.g. equity in the debtor’s property 3)      are the payments dependent on future earnings or continued contributions from the debtor remaining in employment 4)      is there misfeasance or alleged misconduct which may mean that an investigation from the Bankruptcy Trustee and Official Receiver and possible Bankruptcy Restrictions Orders granted by the Court may be in the benefit of current and potential future creditors.

Acceptance

Once an IVA or CVA has been proposed, it will be circulated to all known creditors who will be asked to vote on acceptance at a Meeting of Creditors. If the proposal is accepted at the meeting, the nominee will then become supervisor of the IVA and oversee its operation. Any agreement reached with the creditors will be legally binding. Payments made into the IVA or CVA will be held by the supervisor. They will be distributed to creditors at previously agreed upon intervals, with the first distribution normally expected at some point between the first and second anniversary of the Arrangement’s acceptance.

Conclusion

Without a time machine, it will never be possible to say with complete certainty whether an IVA or CVA, as opposed to a Bankruptcy Order or a Winding Up Order, would ultimately be better for creditors. It is worth remembering that whilst the acceptance of a Voluntary Arrangement doesn't preclude the possibility of bankruptcy/liquidation later (indeed most Voluntary Arrangements contain a clause stipulating that the supervisor will withhold the required funds needed to petition for bankruptcy or winding up in the event that the IVA fails), it does prevent any creditor acting independently to pursue their own outcome via bankruptcy/liquidation whilst the Arrangement is in effect. Furthermore, whilst bankruptcy is still an option following a failed IVA, this will normally be a less attractive proposition to creditors due to the time that has elapsed during the IVA meaning that any assets which were kept out of the IVA may have been disposed of and the timeframe for any return to creditors will be further delayed due to the time 'wasted' during the IVA when compared with pursuing straight to bankruptcy. It will always be a judgement for each individual creditor to make based on the information provided to them. Generally speaking, entering into an Arrangement will be a decision to take the proposal offered rather than risking the unknown consequences of a bankruptcy/winding up. However, no IVA or CVA is ever guaranteed to succeed and they can be frequently dependent on contributions from the business, personal remunerations or third parties over a number of years. In this sense, the decision between entering into a Voluntary Arrangement as opposed to bankruptcy or liquidation may more accurately be described as a decision between having a full and frank independent review of the situation of the company or individual guarantor at present, versus the option to allow a guarantor or a business time to recover and implement a plan with the purpose of achieving a full or partial payment of their creditors. At rebuildingsociety.com we always seek to give the ultimate decision of whether our overall vote is in favour or against an IVA or CVA Proposal to lenders via a decision poll. Lenders will be provided with the full proposal along with as much information as possible and are asked to vote in favour or against the proposal. We pass on the decision of the majority of our lenders to the Insolvency Practitioner and our vote for/against is registered accordingly.