What is an individual voluntary arrangement and what does it

What is an individual voluntary
arrangement and what does it
seek to achieve?
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11 Stone Buildings & FRP Advisory
•Nature of an individual voluntary arrangement
•Purpose of an individual voluntary arrangement
•Composition or scheme of arrangement
•Alternatives to individual voluntary arrangements
Nature of an individual voluntary arrangement
An individual voluntary arrangement (IVA) is an agreement entered into between an
individual and their creditors (and possibly with third parties) for a composition of that
person’s debts or a scheme of arrangement (scheme) of their affairs. The type and
content of the composition or scheme is open-ended and is a matter for the debtor
and their creditors with the assistance of an insolvency practitioner (IP) (described as
the nominee before the IVA is approved, and the supervisor thereafter).
References: IA 1986, s 253(1)
An IVA is effectively a contract, the terms of which are to be found in the IVA
proposal. A private contractual arrangement would however require the assent
of all of an individual’s creditors in order to become a globally binding agreement.
This would obviously not be feasible in the large majority of cases. An IVA, by
contrast, is binding on those creditors who voted against the proposal (or who did
not vote at all), provided the requisite majority of votes in favour were obtained,
and subject always to possible challenges.
References: IA 1986, s 260
Although judicially recognised as a species of (statutory) contract, an IVA proposal
does not amount to an offer for the purposes of the Insolvency Act 1986, s 271(3)
(by which provision a bankruptcy petition may be dismissed in circumstances
where the debtor has made an offer to secure or compound a debt, which offer
has been unreasonably refused by the petitioning creditor).
References: IA 1986, s 271(3)
Re a debtor (No 2389 of 1989) [1990] 3
All ER 984
As a result of its essentially contractual nature, the meaning and effect of any
given IVA must be determined by reference to (and by construction of) its terms.
Practitioners should bear in mind that not every successfully completed IVA will
result in the discharge/release of a debtor’s liabilities.
References: Johnson v Davies and
another [1998] All ER (D) 104
In practical terms, an IVA takes the form of a written document (described as the
proposal) that contains the terms on which the debtor intends to compromise or
rearrange their various relationships with their creditors. The proposal will ordinarily be
put together with the assistance of the nominee (in most cases the proposal is drafted
by nominee with debtor’s input on the proposal). Once complete, the proposal will be
sent out to the creditors and a meeting summoned. The proposal (with the possibility
of amendments) will then be voted on at the meeting of creditors.
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Purpose of an individual voluntary
An IVA is the machinery by which a debtor is able to enter into an agreement
with their creditors that is binding on them. IVAs are proposed in circumstances
where an individual is in financial difficulties and, in some occasions, following
the presentation of a bankruptcy petition. The end game is usually the release
of liabilities outside of the context of bankruptcy (and without the stigma and
prohibitions that that regime entails).
Composition or scheme of arrangement
IA 1986 provides that an IVA may comprise either a composition with creditors
or a scheme of arrangement. In practice, IVAs frequently comprise a mixture of
composition and arrangement.
A composition is an agreement whereby the person’s liabilities to their creditors
are compounded. If approved, creditors bound by the IVA will be paid a dividend
representing X pence in the pound (as opposed to a forecast Y pence in the
pound were a bankruptcy order to be made against the debtor). X will ordinarily be
substantially greater than Y in order to incentivise the creditors to vote in favour of
the voluntary arrangement. This will usually be achieved by some of the following:
References: IA 1986, s 253(1)
References: IRC v Adam & Partners
[2000] All ER (D) 1315, [2001] 1 BCLC 222
• the injection of third-party funds
• inclusion of excluded assets
• contributions over and above those that would be paid by the debtor in
• the costs in an IVA being less than bankruptcy, ie avoiding a tax on all asset
realisations in all bankruptcies
In order to amount to a composition, a monetary payment or some other valuable
consideration must be given to the creditors in return for the compromise of their
claims. If the arrangement effectively amounts to an expropriation of the unsecured
creditors’ rights with no return, it will not be considered to be a composition.
A scheme of arrangement is limitless as to content. It differs in nature from a
composition and involves something less than the compromise of creditor
claims. As with a composition, a scheme must give rise to a quid pro quo with the
creditors. A proposal cannot be regarded as amounting to a scheme if there is
nothing for the creditors to accept. It will generally take the form of an assignment
of certain assets (often real property) to the nominee/supervisor to be used
within the IVA. Schemes may also involve third parties who are prepared to give
financial assistance to the debtor, thereby increasing the return to creditors. In its
most simple form, a scheme may amount to a moratorium on creditor claims/
enforcement for the greater good, with payment of a dividend at the end of the
moratorium period. A moratorium by itself amounts to a scheme for the purposes
of IA 1986, s 253(1).
References: IA 1986, s 253(1)
Re Bradley-Hole (a bankrupt) [1995] 4 All
ER 865
The distinction between compositions and schemes , which do not involve a
compromise of creditor claims, is important. In circumstances where the terms
of an IVA do not provide for a release of the creditors’ rights, by implication
the balance of those debts (minus whatever dividend was paid during the
arrangement) will become payable whenever the IVA completes or the
moratorium expires (whichever is the sooner).
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Alternatives to individual voluntary
IVAs are themselves often regarded as alternatives to bankruptcy. A popular
alternative to the IVA at present is a debt management plan. Such plans are
unregulated and operated outside of the context of the insolvency legislation. In
essence, the debtor makes monthly payments to a debt management company,
that company having struck a deal with the debtor’s creditors. That payment
(subject to the deduction of a commission fee) is then distributed to the creditors.
In some circumstances, debt management plans may be a preferable alternative
to an IVA.
References: Mond v MBNA Europe Bank
[2010] EWHC 1710 (Ch), [2010] All ER (D)
98 (Jul)
Debtors continue to be able to enter into deeds of arrangement with their
creditors and this mechanism has not been abolished by the insolvency
legislation. The problem with deeds made under Deeds of Arrangement Act 1914
(DAA 1914), however, is that they can be easily frustrated by one of the debtor’s
creditors petitioning for bankruptcy. Consequently, deeds of arrangement are
unpopular and exceptionally rare in practice.
References: DAA 1914
IA 1986, s 260(3)
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