It is possible for a debtor to make an arrangement with his/her creditors to avoid the consequences of bankruptcy. The Insolvency Act 1986 introduced a flexible and effective system of voluntary arrangement which is designed to provide an alternative to bankruptcy proceedings (this is considered in Part 1 of this Chapter). Prior to the Insolvency Act 1986 arrangements could be made using the Deeds of Arrangement Act 1914 but these were not very flexible and could be easily defeated by a dissenting creditor presenting a petition for bankruptcy. Consequently, these provisions, were little used. The provisions of the Deeds of Arrangement Act have not been repealed and a debtor may still be able to enter into such a deed (this is considered in Part 2 of this chapter).The county court administration order procedure is designed to assist insolvent individuals with few, if any, assets but who have an income from which small levels of debt (currently under £5,000) can be repaid over a period of time (county court administration orders are considered in Part 3 of this chapter).
This chapter is divided into 3 parts as follows;
Part 1 - Individual Voluntary Arrangements (paragraphs 57.2 to 57.38)
Part 2 - Deeds of Arrangements (paragraphs 57.39 to 57.60)
Part 3 - County Court Administration Orders (paragraph 57.61 to 57.73)
Abbreviations used in this Chapter are:
IA2000 - The Insolvency Act 2000.EA2002 - The Enterprise Act 2002
IPO 1994 - The Insolvent Partnerships Order 1994
DPO - Administration of Insolvent Estates of Deceased Persons Order 1986
IVA - individual voluntary arrangement
FTVA - fast-track individual voluntary arrangement
PVA - partnership voluntary arrangement
CVA - company voluntary arrangement
RTLU - Regional Trustees Liaison Unit
BRO - bankruptcy restriction order
Individual Voluntary Arrangements
The provisions relating to individual voluntary arrangements (IVAs) are contained in Part VIII of the Act and Part 5 of the Rules as amended by the Insolvency Act 2000 (IA2000) and the Enterprise Act 2002 (EA2002) and the Insolvency (Amendment)(No.2) Rules 2002 and the Insolvency (Amendment) Rules 2003 respectively. The IA2000 amendments which came into force on 1 January 2003 effected some general reforms and enabled the IVA procedure to be started without an application for an interim order to create an initial moratorium (see paragraph 57.13).The EA2002 introduced a new fast-track IVA procedure in which the official receiver is able to act as the supervisor (see Chapter 20, Part 6).
The IVA provisions may be used either before or after a bankruptcy order has been made. Whilst details of the procedures relating to a debtor who is an undischarged bankrupt are contained in this chapter, further guidance on the official receiver's role in IVAs is given in Chapter 20. The Insolvency Service's role in IVAs where there is no bankruptcy order is limited to the registration of the IVA on the insolvency register and the collection of the prescribed fee (see paragraph 57.25).
An IVA may constitute either a scheme of arrangement or a composition in satisfaction of debts. The difference between these is that in a scheme the debtor makes over his/her assets to be administered by a trustee whereas in a composition the debtor keeps his/her assets and undertakes to pay over to his/her creditors (in effect to the supervisor) certain sums. An IVA offers flexibility to the debtor in that it may take any form including third party funds (Re Davis v Martin-Sklan (1995) BCC 1122), funds from continued trading, income from the debtor's business or employment and/or an orderly disposition of some or all of his/her assets.
The Deeds of Arrangement Act 1914 (see Part 2) does not apply to an approved voluntary arrangement.
Notes: [s260(3)]
A discharged bankrupt is unable to propose an IVA in respect of the bankruptcy debts. Under section 281 a bankrupt is released from all of his/her bankruptcy debts on discharge and therefore, post discharge, these creditors in the bankruptcy are no longer creditors of the bankrupt. Section 253(1) refers to the making of a proposal to the bankrupt’s creditors but after discharge the bankrupt may not have any creditors. Section 261 only permits an undischarged bankrupt to secure an annulment after the approval of a post bankruptcy order IVA, not a discharged bankrupt. It is for these reasons that it is an impossible concept for a discharged bankrupt to propose an IVA for his/her bankruptcy debts (there is nothing to prevent an IVA for post bankruptcy debts). If the official receiver becomes aware of such proposals he/she must draw these matters to the attention of the court at the first hearing in relation to the IVA application so that the court is kept legally correct.
Notes: [s281] [s253(1)][s261]The debtor should prepare a proposal for an IVA on which the nominee (see paragraph 57.6) is able to make his/her report to the court under section 256 or 256A. Due to the technical matters which are required to be dealt with in the proposal the debtor will almost invariably consult with or instruct an insolvency practitioner, who is most likely to be his/her intended nominee. The result is that most proposals are professionally prepared. At this stage the intended nominee does not have a formal or legal standing and the provisional role is not recognised in the Act or the Rules.
The proposal, which is the key document in an IVA, should explain why the debtor considers that the IVA is desirable and give reasons why creditors may be expected to concur with the IVA. It should also give details of the debtor's assets and liabilities in addition to other prescribed matters. In order to make it likely that the creditors will accept the proposal, it should be credible, an acceptable alternative to bankruptcy and should take account of creditors' legitimate interests.
The debtor must give the intended nominee written notice of his/her proposal and the notice, accompanied by a copy of the proposal must be delivered to the nominee, or the person authorised to take delivery of the documents on his/her behalf.
The proposal must provide for some person (i.e. the nominee) who must be qualified to act as an insolvency practitioner in relation to the debtor and is willing to act, to act in relation to the IVA either as trustee or otherwise for the purpose of supervising its implementation.The proposal should also deal with other matters that may become an issue e.g. whether the debtor continues to trade on his/her own account, the monitoring of the business, and in particular, where there is to be ongoing trading, that the debtor remains liable for his/her own future tax affairs and liabilities. The proposal may clarify the supervisor's powers and the exclusion of the supervisor's liability. The proposal should clarify the debtor's obligations particularly as to the time and amount of contributions so that there is no dispute as to whether he/she has complied with those obligations. Since the debtor may later become bankrupt in respect of post IVA debts, it may be desirable for the scheme to allow a supervisor to register a charge over freehold property and to create a trust in favour of creditors bound under the scheme. A clause may also be included to the effect that creditors inadvertently omitted from the scheme may be included in distributions. Whilst such a clause will not bind those creditors to the scheme, it will overcome objections from the original creditors to the dilution of their dividend(s). The proposal should also set out a time scale for its achievement. The debtor may commit an offence if he/she makes any false representations in his/her proposal for procuring an IVA (see paragraph 20.5).
In practice many insolvency practitioners have sets of standard terms and conditions which may be adopted by debtors and official receivers may look behind these clauses in the event of a subsequent bankruptcy order being made. Where the legislation is silent on any matters concerned with the IVA the proposal documents' contract terms are binding.
If the nominee agrees to act he/she must endorse a copy of the notice under rule 5.4(1) and return it to the debtor.
Notes: [s256, s256A and r5.2][r5.3][r5.4] [s253(2)] [r5.4(2) and (3)]
The debtor must within 7 days after the proposal is delivered to the nominee, or such time as the nominee allows, deliver to the nominee a statement of his/her affairs, which must detail his/her assets (secured and unsecured) preferential and unsecured creditors and details of their names and addresses, indicating any debts owed to associates.
If the debtor is an undischarged bankrupt and has submitted a statement of affairs in the proceedings this statement of affairs is usually sufficient.
Note: [r5.5]
The nominee must be an authorised insolvency practitioner nominated in the proposal to act in relation to the IVA as trustee or otherwise for the purpose of supervising its implementation. In the fast track procedure the official receiver will be the nominee (see Chapter 20, Part 6).
The nominee’s powers are limited but important and it should be remembered that the statutory powers of the nominee were drafted on the basis that the proposal would be drafted by a person other than the nominee. It is likely that the intended nominee has been actively involved in formulating the proposal. The nominee's principal tasks are to prepare his/her report, chair the meeting of creditors and file his/her report with the court.
The nominee may request additional information to supplement the debtor's proposal and statement of affairs before preparing his/her report to the court. The debtor is required to give the nominee access to his/her accounts and records so that the nominee may consider the proposal.
Notes: [s253(2)][r5.6]
An interim order is a court order that creates an initial moratorium on proceedings against the debtor who intends to apply for an IVA. The aim of the interim order is to enable a viable IVA to be put to creditors as a whole without being spoilt by the action of one or more individual creditors. The IA2000 inserted section 256A in the Act and has removed the requirement to apply for an interim order in every case (see paragraph 57.13) This can cut down on the cost and delays in the IVA procedure.
Note: [s252] [s256A]
When a debtor intends to make a proposal to his/her creditors for a composition in satisfaction of his/her debts or a scheme of arrangement of his/her affairs, an application may be made to the court for an interim order. The application may be made at any time by the debtor or, if he/she is an undischarged bankrupt, the trustee of his/her estate or the official receiver (see paragraphs 20.23) but only one application may be made in a 12 month period.
An application to the court for an interim order must be accompanied by an affidavit specifying the matters prescribed in rule 5.7.
Except in the case of an undischarged bankrupt, the application for an interim order should be made to a court in which the debtor would be entitled to present his/her own petition in bankruptcy. If the debtor is a bankrupt, the application should be made to the court which has conduct of the bankruptcy and filed with those proceedings although a file for the IVA is maintained separately. The application for an interim order should be accompanied by an affidavit which should include the reasons for making the application and other required information together with a copy of the proposal. On receiving the application and affidavit, the court will fix a date for hearing the application.
Notes: [r5.7(3)]Where the debtor is an undischarged bankrupt, the applicant has to give at least two days' notice of the hearing to the bankrupt, the official receiver and the trustee ( whichever of them is not the applicant). Where the debtor is not an undischarged bankrupt, then at least two days' notice of the hearing has to be given to any creditor who the debtor knows has presented a bankruptcy petition against him/her. In all cases at least two days' notice of the hearing has to be given to the nominee who has agreed to act in relation to the proposal.
An application for an interim order may not be made while a bankruptcy petition presented by the debtor is pending if the court has appointed an insolvency practitioner under section 273 to inquire into the debtor's affairs since the court can in such circumstances grant an interim order on its own initiative if it considers it appropriate to do so following receipt of the practitioner's report. When an application is pending the court can also take immediate steps to protect the debtor and his/her assets from legal action.
Notes: [s253][s255(1)][r5.7][r5.8][r5.7(3)][r5.7(4)][s253(5)][s274(3)(a)][s254]The hearing of the application for an interim order will usually be in chambers before a Registrar or District Judge. Any person who was given notice of the hearing under rule 5.7(4) may appear or be represented at the hearing. The court will consider any representations made by those persons when deciding whether to make an interim order. The court is entitled to look at the whole proposal and is not bound to make an interim order. If the court makes an interim order, it will fix a venue for consideration of the nominee’s report, which should not be later than the date on which the interim order ceases to have effect, subject to any extensions the court may grant. In many instances this is an unnecessary delay and expense and the practice has arisen for the court to be invited to consider the nominee’s report at the same time as the application for an interim order (see Practice Direction (Bankruptcy: Voluntary Arrangements) [1992] 1WLR 120). In certain circumstances the High Court will make a "concertina" order combining the interim order and the order made on considering the nominee’s report. This procedure has been adopted by the courts to avoid the necessity for separate hearings to make an interim order and to consider the nominee’s report, thereby reducing costs and assisting in the conduct of the proceedings. Furthermore, in suitable cases, some courts are prepared to make such orders without the attendance of the debtor or the nominee, for once the documents are delivered to the court, they are put before a Registrar or District Judge for "hearing" (see Practice Direction as quoted above). This procedure is again designed to save time and costs. Whilst some County Courts adopt a similar flexible approach, others prefer, upon the making of the interim order, to set a further date for the consideration of the nominee’s report.
Notes: [r5.9]The court will not make an interim order unless it is satisfied that,
The court is not required to make an interim order where these four conditions are not satisfied. It has discretion to do so where it considers that it would be appropriate for the purpose of facilitating the consideration and implementation of the proposal. In practice an insolvency practitioner will undertake all of this type of work for an insolvent person and present a "package" to the court, often after drafting the proposals and contacting main creditors to establish what type of proposal they might be prepared to accept.
The court is required to send 2 copies of the interim order to the applicant, who should serve a copy on the nominee. The applicant is also required to give notice of the interim order to any person who had notice of the hearing but was not present or represented at it.
Notes: [s255][r5.10;Form 5.2]An interim order has the effect, during the period it is in force, of preventing a petition for bankruptcy being presented or proceeded with against the debtor or a landlord or other person to whom rent is payable exercising right of forfeiture by peaceable re-entry to premises let to the debtor.
It also prevents other proceedings (including execution) being commenced or continued without the leave of the court. A creditor is thus prevented from presenting a bankruptcy petition even if the debtor has failed to comply with a statutory demand. A secured creditor is not restrained from enforcing his/her rights where this does not involve judicial process. Where such process is involved it is advisable for the creditor to seek the leave of the court but it is difficult to envisage such leave being refused. The making of an interim order does not affect the right to make restraint, charging or confiscation orders or the appointment of a receiver under the Drug Trafficking Act 1994 and the Criminal Justice Act 1988 (Re M [1992] 1 All E.R.537).
Notes: [s252(2)] [Drug Trafficking Act 1994] [Criminal Justice Act 1988]The aim of the interim order is to provide a breathing space to allow a viable proposal to be formulated and agreed by creditors. However, the provisions, especially those relating to extensions of time, cannot be used to continually obstruct bankruptcy proceedings and the continuance of an interim order is dependant on it serving a useful purpose (Re Cove (A Debtor) [1990] 1 All ER 949).
An interim order is effective for 14 days beginning with the day after the order is made although it may be renewed. The court does not have unlimited discretion to extend the period of an interim order (Re James William Sykes a debtor (judgment delivered 28 July 1995)). The court may discharge an interim order if it is satisfied on the application of the nominee that
If the creditors decline to approve the debtor's proposal, with or without modifications, the court, on receipt of the report of the meeting, may discharge any interim order which is in force.
Notes: [s255(6)][s256(6)][s259(2]Where a debtor intends to make a proposal for an IVA and no application for an interim order is made the nominee must deliver two copies of his/her report (see paragraph 57.14) to the court within 14 days (or such longer period as the court may allow) after receiving the proposal and statement of affairs from the debtor. The report must be accompanied by a copy of the debtor's proposal, the statement of affairs and the nominee's consent to act. It must also state that no application for an interim order is to be made.
Where the debtor is an undischarged bankrupt the nominee must send a copy of the proposal, his/her report and comments and the statement of affairs to the official receiver and any trustee. Where the debtor is not bankrupt these documents should be sent to any person who has presented a bankruptcy petition against the debtor.
Notes: [s256A][r5.14]The nominee should, at least 2 days before the interim order ceases to have effect, or within 14 days of receiving the proposal from the debtor where no application for an interim order has been made, submit a report to the court stating whether in his/her opinion a meeting of the debtor's creditors should be summoned to consider the proposals and if such a meeting should be summoned, the venue of the meeting. The nominee may apply to the court for an extension of the period of the interim order or the 14 day period if he requires more time to prepare his/her report.
The purpose of the report is not to approve the proposal but to state whether, in the nominee's opinion, a meeting of the debtor's creditors should be summoned to consider the debtor's proposals. If the nominee recommends a creditors' meeting be held, he/she should attach his/her comments on the proposal. If the nominee does not recommend a meeting, he/she must give his/her reasons. There is no statutory form for the nominee's comments but they usually include the basis of the asset valuations, the reliability of the debtor's estimate of liabilities, information on the debtor's attitude and reliability, details of any previous failure(s) and reasons why the proposal will be more beneficial than alternative insolvency proceedings.
Whilst the legislation does not list the duties imposed upon the nominee, recent case law has clarified certain duties. The nominee must go further than merely ensuring that the proposal contains the matters required by the legislation. In making his/her report to the court, the nominee has a duty to exercise professional independent judgment, major deficiencies in his/her report may expose him/her, on a successful challenge to the approval of the scheme, to personal liability for costs in those proceedings (Re Cove (A Debtor)No 222 of 1990 [1993] BCLC 233). The nominee needs to consider whether the debtor can perform his/her obligations, whether the IVA is feasible, fair to creditors and the debtor and an acceptable alternative to bankruptcy (see Chapter 20 - Part 5). After receiving the nominee's report, if the court is satisfied that a meeting should be summoned, the court can extend the interim order for a further period so that the proposal can be considered by the creditors. Although several extensions of the interim order can be granted, the court will not do so ad infinitum (Re Cove (A Debtor) [1990]1 All ER 949).
The debtor can apply to the court to have the nominee replaced if he/she fails to submit a report in which case the court may direct that the nominee be replaced by another qualified insolvency practitioner who had filed in court his/her consent to act or may extend the period of any interim order in force.
A creditor who has petitioned for bankruptcy may appear or be represented at the hearing by the court to consider the nominee's report.
Notes: [s256 and r5.11][s256(4)][s256(3) and r5.12]
Where the nominee has reported to the court that in his/her opinion a creditors' meeting should be summoned to consider the debtor's proposal and no interim order is in force, the meeting should be held not less than 14 days and not more than 28 days from the date on which the nominee's report is filed in court. Where an interim order is in force the meeting should be held not less than 14 days and not more than 28 days from the date on which the nominee's report is considered by the court.
At least 14 days before the date of the meeting, the nominee is required to send notice of the meeting to all creditors shown in the debtor's statement of affairs and to any other creditors of whom the nominee is aware. The notice should specify the court to which the nominee's report has been delivered and should summarise the voting requirements in rule 5.23. In addition to the notice, the creditors should be sent a form of proxy, copy of the proposal, a copy of the statement of affairs (or a summary of it ) and the nominee's comments on the proposal. If notice of less than 14 days is given to creditor(s), the creditor(s) will not be bound by the IVA. The nominee should have regard to creditors' convenience when fixing the venue for the meeting and ensure that it is held on a business day commencing between 10 a.m. and 4 p.m
Notes: [s257 and r5.17] [r5.23] [r5.18, Form 8.1]The creditors' meeting is summoned to decide whether to approve the proposed IVA, with or without modifications. The creditors may agree to accept or reject the proposal made by the debtor or approve the proposal with modifications but in the latter case, only if the debtor consents to the modifications. Whilst neither the Act nor the Rules specifically require the debtor to attend the creditors' meeting, in practice it will always be essential for him/her to do so, since modifications might involve an amount of negotiations between the debtor and the creditors. The modifications may include a change of nominee or proposed supervisor but any changes which would affect the rights of secured creditors to enforce their security are only permitted if those creditors agree. Similarly, any changes to the status of preferential creditors (such as ranking pari passu with unsecured creditors) may only be agreed with the consent of those creditors.
The chairman of the meeting should be the nominee or a qualified insolvency practitioner or an employee of the nominee who is experienced in insolvency matters. The chairman cannot use any proxy held by him/her to increase or reduce the amount of the remuneration or expenses of the supervisor unless the proxy directs him/her to vote in that way. A resolution may be taken by creditors, where two or more persons are appointed to act as supervisor, on whether their actions are to done jointly or whether they may act on their own.
Notes: [s258][s258(2)][s258(3)][s258(5)][r5.19][r5.20][r5.25(1)]Subject to the limitations set out in rule 5.21, every creditor who has notice of the creditors' meeting is entitled to vote at it or any adjournment of it.
A creditor's entitlement to vote is calculated as follows;
where the debtor is not an undischarged bankrupt and an interim order is in force, by reference to the amount of the debt owed to him/her at the date of the interim order,
where the debtor is not an undischarged bankrupt and an interim order is not in force, by reference to the amount owed to him/her at the date of the meeting, and
A creditor may vote in respect of a debt for an unliquidated amount or any debt whose value is not ascertained, and for the purpose of voting (but not otherwise) his/her debt shall be valued at £1 unless the chairman agrees to put a higher value on it.
The chairman has power to admit or reject creditors' claims for voting in whole or in part but his/her decision is subject to appeal to the court by any creditor or by the debtor. The court may order another meeting to be summoned if the chairman's decision is reversed or varied or a creditor's vote is declared invalid on an appeal.
If the chairman is in doubt, as to whether a claim should be admitted or rejected he/she must mark the vote as "objected to " under rule 5.21 but allow the creditor to vote subject to such votes being declared invalid if the objection to the claim is sustained. It is possible to include and agree a claim for future rent. In such instances the chairman should agree to put a minimum value on the debt which the landlord is entitled to vote upon. The creditor is then bound by the IVA in respect of that claim (Doorbar v Alltime Securities Ltd [1994] BCC 994 and (No2) [1995] BCC 728).
Creditors with claims in respect of which written notice of the meeting was not given but who learn about the meeting through some other means are entitled to vote at the meeting (In Re Debtors Nos 400 and 401 of 1996), but those who neither receive notice of the meeting nor learn of it independently are not entitled to vote at it and are therefore not bound by the IVA.
Notes: [r5.21][r5.22] [r5.21]A secured creditor is entitled to notice of the creditors’ meeting and to vote, although its vote on the debt, or the secured part of the debt if partly secured, will be left out of account when calculating the majority. Since a secured creditor is entitled to vote, it will be bound by the IVA.
Note: [r5.23(3)]
The approval or modification of a proposal at a creditors' meeting requires a majority in excess of three-quarters in value of the creditors present in person or by proxy and voting on the resolution. In respect of any other resolution proposed at the meeting, e.g. the supervisor's remuneration, a majority in excess of one half of those creditors is required.
There are provisions to invalidate resolutions when they are carried by the votes of certain "connected" creditors. Votes in respect of a wholly secured claim are left out of account when calculating the majority. Where a claim is partly secured, votes in respect of the secured part are left out of account (Calor Gas Ltd v Piercy & Others [1994] BCC 69).
If no creditor votes, the IVA cannot be approved.
If the requisite majority for the approval of the IVA (with or without modifications) has not been obtained, the chairman may adjourn the meeting for not more than 14 days. There may be more than one adjournment but the final adjournment must not be to a day later than 14 days after the day on which the meeting was originally held. If following a final adjournment the proposal is not agreed to, it is deemed to have been rejected.
Notes: [r5.23][r5.23(4)] [r5.23(3)][r5.24(3)]The chairman must file a report in court within 4 days of the meeting, containing details of
whether the proposal was approved or rejected, with what (if any) modifications,
the resolutions taken and the decision on each one,
a list of creditors and their respective votes,
whether in the opinion of the supervisor the EC Regulation applies to the IVA and if so whether they are main or territorial proceedings, and
include any further information (if any) the chairman thinks appropriate to make known to the court.
Note: [r5.27]
Where a creditors' meeting approves the proposal, this has the effect of binding every person who in accordance with the rules was entitled to vote at the meeting (whether or not he/she was present or represented at it) or would have been so entitled if he/she had received notice of it, as if he/she were a party to the IVA. The approved IVA is deemed to be in force and effective from the date of the creditors' meeting; no further orders of the court are necessary.
Any interim order lapses immediately after the expiry of 28 days starting with the day when the report of the creditors' meeting was presented to the court, subject to any directions which the court gives for the purposes of an application under section 262 .
Any bankruptcy petition which had been presented and was stayed by the interim order is treated as dismissed, unless the court orders otherwise.
A creditor who is not given notice and/or is not entitled to vote will not be bound by the IVA and will be entitled to pursue legal remedies against the debtor. A creditor who votes on a proposal cannot avoid being bound thereby by subsequently claiming that part of his/her debt was not ascertained at the date of the meeting and had not been included in the figure he/she stated was owed (Re a Debtor (No 47 of 1996) The Times 20 March 1997).
Notes: [s260][s260(4)][s260(5)]
An application may be made to the court to challenge the decision of the meeting of creditors on one or both of the following grounds,
The application may be made by the debtor, the nominee, a person who was entitled to vote at the creditors' meeting in accordance with the rules and where the debtor is an undischarged bankrupt, the trustee or the official receiver. The application must be made within 28 days of the result of the creditors' meeting being reported to the court. In the case of a person who was not given notice of the creditors' meeting the application must be made within 28 days beginning with the day on which he/she become aware that the meeting had taken place.
False or misleading information provided by a debtor in his/her statement of affairs or proposal would constitute a "material irregularity at or in relation to the creditors' meeting" (Re A Debtor (No 87 of 1993)(No2)[1996] BPIR 64).The official receiver is only expected to apply in exceptional circumstances e.g. on the basis of "public interest", but must show either unfair prejudice or material irregularity.
Where the court is satisfied that one of the grounds is made out, it can revoke or suspend the approval and/or direct the summoning of further meetings, as well as giving supplemental directions (Re A Debtor (No 83 of 1988)[1990] 1 WLR 708). Rule 5.30 sets out the notice requirements which apply when the court makes an order under section 262 revoking or suspending the creditors' approval of the IVA.
Applications under section 262 are often made jointly with an application to appeal against a decision of the chairman under rule 5.22(3).
Notes: [s262] [r5.30] [r5.22(3)]The debtor commits an offence if, for the purpose of obtaining the approval of his/her creditors to a proposal for an IVA he/she make any false representations, or fraudulently does or omits to do anything.
Note: [s262A]
If it appears to the nominee or the supervisor that the debtor has been guilty of any offence in connection with the IVA for which he/she is criminally liable the matter should be reported immediately to the Criminal Allegations Liaison Team.
Note: [s262B]
Under rule 6A.1 the Secretary of State is required to maintain an individual insolvency register recording matters relating to bankruptcies and IVAs and is required to enter all matters reported to him/her under rules 5.29 (reports to the Secretary of State) and 5.34 (completion or termination of an IVA).
Where an IVA is made under section 263A, FTVAs (see Chapter 20, Part 6) the register must record the name and address of the debtor, the date the IVA was approved by creditors and the court in which the official receiver's report has been filed.
All information concerning an IVA will be deleted from the register of IVAs where a notice that the IVA has been revoked, fully implemented or terminated has been received.
The register of IVAs is kept by Insolvency Practitioners Control Unit in Birmingham and is open to public inspection, without charge, on any business day between 9am and 5pm. Where an obligation to enter information onto or delete information from, the register arises, the information must be entered/deleted as soon as practicable after it arises.
The official receiver can view the register through the Central Index. The chairman of a creditors' meeting approving an IVA is required to provide details of the IVA to the Secretary of State for registration.
Notes: [r6A.1, r6A.2(a)][s263A][r6A.3]
Once the scheme has taken effect, the nominee becomes the supervisor of the scheme. He/she must take out a specific bond relating to the appointment and comply with the requirements of the Insolvency Practitioners Regulations 1990 (as amended). The debtor and the official receiver or trustee (if the debtor is a bankrupt) must ensure that the supervisor is given possession of the assets included in the IVA (see paragraph 20.36).
The supervisor is required to keep records and accounts of his/her acts and dealings in and in connection with the IVA, including in particular records of all receipts and payments of money, which may be inspected by the Secretary of State, and at least once every 12 months he/she must issue a report on the progress of the IVA, including an abstract of receipts and payments, to be sent to the court, the debtor and all creditors bound by the IVA. If during the period no receipts and payments have been made, a statement to that effect must be sent.
The supervisor may also consider any transactions defrauding creditors and may apply to the court for an order restoring the position to what it would have been if the transaction had not been entered into and protecting the interests of the victim of the transaction. The supervisor may also apply to the court at any time for directions if, for example, a problem arises in the administration of the IVA. The supervisor is able to present a bankruptcy petition against the debtor (see paragraph 57.30). If the debtor, any of his/her creditors or any other person is dissatisfied by the actions, omissions or decisions of the supervisor, he/she may apply to the court, whereupon the court may confirm, reverse or modify any decisions of the supervisor or give him/her directions. Misconduct by the debtor or failure by the supervisor either to seek directions from the court or to present a bankruptcy petition could be the basis for such an application.
Notes: [s263][reg 12 IPR][r5.26][r5.31 and r5.32][s423][s263(4)][s264(1)(c)][s263(3)]
It is possible for a debtor who is an undischarged bankrupt to nominate an insolvency practitioner to act as nominee/supervisor and to propose an IVA.Reference should be made to Chapter 20, Part 5 which outlines the official receiver's role in these IVAs and the procedures to be followed by official receivers. The EA2002 inserted sections 263A to G and 389B into the Act and has introduced a fast track IVA procedure where the official receiver will be the supervisor. For full details of the FTVA procedures see Chapter 20 Part 6.This paragraph covers an application for an IVA made by the bankrupt where the proposed nominee is not the official receiver.
Where a bankrupt wishes to make an IVA he/she is required to give notice of his/her proposal to the official receiver and, if any, his/her trustee; this should contain the name and address of the nominee. Where the bankrupt is applying for an interim order he/she must give at least 2 days notice of the hearing of the application for an interim order to the official receiver and any trustee. The official receiver should normally attend the hearing in his/her capacity as receiver and manager or trustee. The official receiver should not seek to frustrate the proposal but should acquaint the court with any problems that have been encountered (see paragraphs 20.30).
Where an interim order is made in the proceedings it may contain provisions regarding the conduct of the bankruptcy and the administration of the bankrupt's estate during the period that the order is in force; these may include a provision staying the bankruptcy proceedings (see paragraph 20.25). However, the interim order will not relax or remove any requirement in the bankruptcy unless the court is satisfied that it is unlikely that it will result in a reduction in value of the debtor's estate.
The official receiver should examine the nominee's report (as detailed in paragraph 57.14) on the bankrupt's proposal and may make representations in relation to it at the hearing by the court to consider the report (see paragraph 20.30).
Notice of the creditors' meeting should be sent to all creditors mentioned in the statement of affairs and any other creditors of whom the nominee is aware, including creditors in respect of debts which are not provable debts in a bankruptcy e.g. matrimonial debts (Re AJW Bradley-Hole [1995] BCC 418). Rule 12.3, which excludes matrimonial claims from a dividend entitlement in a bankruptcy, does not apply to IVAs. Notice of the result of the creditors' meeting must be sent to the official receiver and to any trustee.
Where a creditors' meeting has approved an IVA the court shall, on the application of the bankrupt or where the bankrupt fails to make an application the official receiver, annul the bankruptcy (see paragraph 20.38).The court may give such directions about the conduct of the bankruptcy and the administration of the bankruptcy estate as it thinks appropriate for facilitating the implementation of the approved IVA. However, the court may not annul the bankruptcy order until 28 days after the chairman's report of the creditors' meeting has been made to the court or whilst a challenge is pending (see paragraph 57.20).
Notes: [s253(4) andr5.4(5)][r5.7(4)][s255(3)][r5.9(1)][r5.17][s261]
Once a proposal is approved the IVA should get under way as soon as practicable, subject only to being halted by a challenge under section 262 (see paragraph 57.22). The official receiver or trustee should do all that is required for putting the supervisor into possession of the assets included in the IVA as soon as practicable after the creditors' meeting. A receipt should be obtained for any physical assets held by the official receiver. A handover to a supervisor does not involve the record book, estate cash book or other documents usually handed over to a trustee (see Chapter 17).
On taking possession of the assets, the supervisor should discharge any balance due to the official receiver or trustee (or provide a written undertaking to discharge any such balance out of the first realisation of assets). In practice, the official receiver will deduct his/her fees, costs and expenses before handing over any balance to the supervisor. When the supervisor discharges the official receiver's debit balance, no realisation fee or Secretary of State fee should be charged on the payment of that balance. If there are insufficient assets in hand, the official receiver should obtain from the supervisor a written undertaking to discharge amounts due to the official receiver out of the first realisation of assets.
Any assets not included in the IVA should remain in the control of the official receiver as receiver and manager or trustee until the bankruptcy order is annulled or other directions for their disposal are made by the court.
Notes: [r5.26(1)][r5.26(2)] [r5.26(3)]Within 28 days of the completion of an IVA, the supervisor must give notice of the completion and submit a final report to all creditors bound by the IVA and to the debtor. The report should include a summary of receipts and payments and set out any difference in the implementation of the IVA as compared with the proposal which was approved by the creditors' meeting. A copy of the notice and report should also be sent to the court and the Secretary of State within the same time limit. These time limits may be extended by the court, on the supervisor's application. The supervisor shall not vacate office until after the notice of completion and a copy of the report have been sent to the court and the Secretary of State.
Note: [r5.34]
Default by a debtor in connection with an IVA is identified by the Act as a ground for a bankruptcy order. A petition for an order on this ground may be presented by the supervisor or any person bound by the IVA (other than the debtor), if the debtor has :
failed to comply with his/her obligations under the IVA,
given false or misleading information in connection with the IVA, or
failed to do everything reasonably required of him/her by the supervisor of the IVA for the purposes of the IVA.
The proposal may set out that the supervisor should retain sufficient monies to pay the costs of such a petition. If a supervisor presents a bankruptcy petition on the basis of a default in connection with an IVA, the IVA is deemed to have been brought to an end (Re Davis v Martin-Sklan [1995] BCC 1122). The assets which are held in the IVA should be released to the trustee, subject to any properly incurred expenses of the administration which are a first charge on those assets or funds. Consequently the bound creditors are released from the IVA and may seek to recover their debts by proving in the bankruptcy (Re Davis v Martin-Sklan (1995) BCC 1122).
If the supervisor is without funds, he/she may prefer merely to circulate to creditors a "certificate of non-compliance" which states that the debtor has defaulted and the IVA is at an end. This will leave the creditors or the debtor with the option of presenting a bankruptcy petition. In any event the supervisor should issue his/her final reports.
Notes: [s276][s264(1)(c)] [s276(2) and r5.33] [r5.34]The failure of an IVA is not dealt with in the legislation and ideally the proposal should set out specific circumstances in which the proposal will be deemed to have failed and details of the action to be taken by the supervisor. It may be desirable to allow the supervisor some discretion to permit the scheme to continue if there is only a minor setback but it should also give him/her authority to issue a certificate of non-compliance when it becomes apparent to him/her that the scheme has failed. It may be that the scope for action is limited due to lack of funds. However, it is envisaged that a supervisor must take some positive action if it appears that an IVA is failing either in accordance with the provisions of the proposal or where there are no such provisions by seeking directions from the court or petitioning for a bankruptcy order (Re A Debtor No 222 of 1990)(No 2)[1993] BCLC 233).
Where the court has made an interim order and the nominee learns that the debtor has died, the nominee should give notice of the death to the court, whereupon the court will discharge the order. If the debtor dies before the creditors' meeting is held, it should not be held. If the debtor was an undischarged bankrupt at the date of his/her death, the personal representative should give notice of the death to the official receiver and any trustee. An IVA proposed by a bankrupt can revert to bankruptcy proceedings, without the supervisor presenting a petition, if the debtor died prior to the bankruptcy order being annulled. Sections 260 and 262, which deal with the effect of approval and challenge to the decisions made by the meeting of creditors, cease to apply on or after the death of the debtor. Where the debtor dies after an IVA has been approved, the supervisor must give notice to the court of his/her death. It is not clear whether the IVA can then go ahead, notwithstanding the debtor's death. The disapplication of section 260, for example, which provides that the creditors are bound, indicates that they will no longer be bound after the debtor's death. However, there are other indications in the Administration of Insolvent Estates of Deceased Persons Order 1986 that the IVA may continue after the debtor's death and it is thought that the courts would be likely to take the view that the IVA could in principle continue. A difficulty would, however, arise if the IVA contained provisions in which the debtor had to personally participate, e.g. the carrying on of a business or contributions from earned income, and the court may take the view that the IVA should cease at least in these circumstances. The IVA itself might also provide for termination in the event of the debtor's death (see also Chapter 54 - Deceased Insolvents).
Notes: [Sch 1,Part IIIpara 1 DPOamending s256][Sch 1,Part IIIpara 2 DPO amending s257][Sch 1,Part IIIpara 4 DPO]Apart from a petition in connection with a default by the debtor (see paragraph 57.30), it is possible for a petition to be presented by a creditor who is not bound by the IVA or creditor(s) whose debts arose after the IVA. The making of a bankruptcy order does not automatically terminate an IVA to which the bankrupt was subject at that time unless the terms of the IVA so provide (Re McKeen (a debtor)[1995] BCC 412). The effect of a subsequent bankruptcy on an existing IVA will depend on the circumstances of the case, the terms of the IVA and, in particular, any trust clause contained in the IVA (Re AJW Bradley-Hole, ex parte Knight [1995] BCC 418).
If the bankruptcy order is made on the petition of the supervisor presented under section 264(1)(c), then the IVA is thereby terminated (Re Davis v Martin-Sklan (1995) BCC 1122). If a petition was presented by a creditor who was not bound by the IVA, e.g. one whose debt arose after the approval of the IVA, it should be established whether at the time the bankruptcy order was made there was a breach of the terms of the IVA on which a petition under section 264 (1) (c) could have been presented and therefore the IVA would be likely to come to an end. If such a petition could not have been presented it is likely that the IVA continues in force (subject to what is provided in the proposal) although this matter is not free from doubt. If the debtor presents his/her own petition, it is not clear that the IVA will come to an end. Again, it is necessary to consider whether there were breaches in the IVA which would be grounds for a supervisor presenting a petition under section 264(1)(c) and again reference should be made to the terms of the IVA which might well provide that it comes to an end in these circumstances. Notes: bankruptcy [s264(1)(c)]The Court of Appeal judgment in Re: N T Gallagher & Son Ltd [2002] All ER (D) 396 affects the way in which the official receiver should treat the assets of an IVA once a bankruptcy order has been made. Although the case relates to a Company Voluntary Arrangement, the judgment is clear that it can also be applied to an IVA.
The decision in the case means that the supervisor of an IVA who has received contributions from the subject of the IVA is in effect a trustee of those monies for the IVA creditors. The effect of bankruptcy on this trust created by the IVA will depend on the terms of the IVA itself. Where the IVA provides for what is to happen on bankruptcy or the failure of the IVA, those provisions should be followed. However, where there are no such provisions contained in the IVA, any trust created by the IVA over the assets will continue despite the making of a bankruptcy order.
Where the bankrupt has not complied with his/her obligations under the terms of the IVA, it appears that if the IVA comes to an end, his/her creditors will be creditors in any subsequent bankruptcy but where he/she has fulfilled his/her obligations, those creditors may not be creditors in the bankruptcy and notices need not be sent to them (see Chapter 20) although there remain some doubts on these matters. As far as the creditors in the IVA are concerned, they may only claim in the subsequent bankruptcy for as much of their debt as remains after payment of what has been or will be recovered from the monies or assets held in trust under the IVA.
On the making of a bankruptcy order following the failure of an IVA, the official receiver should request the supervisor to provide details of the IVA proposal (as amended) agreed by the creditors, a copy of the statement of affairs and details of the assets (both realised and unrealised) and any trusts that he/she considers may have been established by the IVA. The official receiver should then look at the wording of the agreed proposal to confirm whether any monies or assets held by the supervisor are held on trust for the benefit of the IVA creditors. The supervisor must be notified by the official receiver of the conclusions arrived at as soon as possible in the expectation that the position will be agreed between them.
In bankruptcy cases where an asset has been placed in trust under the IVA, it will remain vested in the bankrupt following section 283(3) which states that property held by the bankrupt on trust for another person is not to be treated as comprising part of the bankrupt’s estate. It will thus be for the bankrupt to realise any outstanding asset(s) and account to the supervisor for any realisation(s).
In those bankruptcy cases where the IVA has not failed and the bankrupt has a continuing obligation to make payments to his/her supervisor this should not automatically be deemed as sufficient reason not to pursue an income payments order.
Rule 6.46A provides that where a bankruptcy order is made and an IVA is in force at the time the petition is presented, expenses properly incurred in the administration of the IVA shall be a first charge on the bankrupt’s estate but this is only applicable in cases where the bankrupt presents their own petition. Section 276(2) makes the same provision when the (former) supervisor presents the petition under section 264(1)(c). In both cases, the unpaid expenses will be a first charge on the bankruptcy estate even though the underlying asset from which they are paid may not have been included in the IVA. In both cases, where the (former) supervisor seeks to act in this way, consideration should be given to the terms, as amended, of the proposal for the IVA to ensure that the expenses are authorised and are otherwise 'properly incurred'. If the official receiver is in any doubt as to the validity of the claim for expenses, he should raise his doubts with the (former) supervisor.
The effect of a bankrupt's discharge from bankruptcy on his/her obligations under an IVA is unclear. However, since discharge only releases the bankrupt from bankruptcy debts and the debts under an IVA may not be bankruptcy debts in the light of Re McKeen (a debtor)[1995] BCC 412), it is thought unlikely that discharge from bankruptcy releases the bankrupt/debtor from his/her obligations under an IVA which survived the making of the bankruptcy order.
HM Customs and Excise will not regard the supervisor as being responsible for accounting for VAT either during the period from which he/she was first involved as nominee or as regards the period from the date of the creditors' meeting. However, the supervisor should ensure that proper records are kept, returns made and VAT fully accounted for. If the supervisor continues the trading of the business, the position regarding VAT should be specified in the proposal. The principal requirement for claiming VAT bad debt relief is that the debt is more than six months old and that it has been written off.
Notes: [Value Added Tax Act 1994 s36]A supervisor is not separately assessed in respect of the debtor's income during the period of the IVA. If the debtor is in business, there is no new accounting period and income continues to be assessed on the debtor in the normal way. The supervisor must, however, separate liabilities to the Inland Revenue prior to the relevant date (i.e. the date of the creditors' meeting) which are treated as claims against the estate, from ongoing liabilities relating to income accrued during the period of the IVA. The Inland Revenue and HM Customs and Excise will frequently require that taxation returns be brought up to date and that future returns be submitted on time as a condition of their consent to the proposal.
The partners of an insolvent partnership may propose a voluntary arrangement for a joint estate but in practice this will be interlocking with the proposals in respect of their own affairs. Reference should be made to Chapters 53 - Partnerships and 56 - Alternative Corporate Procedures for guidance on this matter.
Notes: [Insolvent Partnership Order 1994, article 4]