What Would an Individual Voluntary Arrangement Set You Back?
An issue for people who find themselves insolvent and who are evaluating entering into an Individual Voluntary Arrangement (IVA) with their creditors, is whether they can afford to pay the expenses and fees of the procedure. While this is an reasonable concern, it shouldn’t really be a worry. Firms which offer insolvency services can reassure borrowers on this question and put debtors’ fears to bed quickly.
In the first instance it is really the creditors who pay the costs and fees of the IVA since the monies which the insolvent debtor contributes to the IVA goes towards repaying the debts incurred by the debtor with his or her creditors, in part or in a minority of cases in whole. The total amount contributed by the debtor over the life of the IVA is sometimes called the IVA ‘pot’ or the IVA fund’. The costs and fees of administering the IVA are paid from this fund. In relation to the payment of fees, let us look at the role of the Insolvency Practitioner or the IP. The IP is called the Nominee up to the time when the IVA is approved (or rejected) at the Meeting of Creditors and, assuming the IVA is approved at the Meeting of Creditors, the IP is called the Supervisor. These are simply the terms used in the insolvency legislation and reflect the fact that the role of the IP changes somewhat between the time when the IVA proposals are offered to creditors and the time when the proposals are accepted. Under the law, the Nominee IP need not be the same person as the Supervisor IP although generally the same IP carries out both roles, provided creditors are happy with that arrangement.
The Supervisor IP takes the contributions to the IVA from the borrower during the agreed upon time period of the IVA, commonly five years, and he or she is responsible for managing the money and paying from it. These payments can be broadly divided into three kinds: returns to creditors; fees payable to the IP (Nominee & Supervisor) and disbursements such as the expense of registration of the IVA and insurance. Following a court case in the last year, there is no VAT payable on the IP fees for insolvency services.
The amounts of the IP fees are not arbitrary. These are determined when the Meeting of Creditors approves the IVA to begin with. A minimum of 75% of the voting creditors would have had to consent to these fees. The normal practice is that the IVA offer presents the details of the projected IP fees and IVA costs and the lenders can easily change these, by means of variations to the IVA, if they think that the fees are too high. When the IVA is up and running, the IP may not charge more than the previously decided figures without the express authorisation of the lenders. Once again at least 75% of creditors, as measured by the worth of the money owed, must consent to any rise in the fees of the supervisor, regardless if the task of supervising the IVA ends up being more substantial and expensive than originally anticipated. Lenders are not slow to cut down fees if they feel that they are excessive because the lower the fees the higher the level of debt that will be repaid to them or to use the normal terms, the greater the dividend to lenders.
Thus, the insolvent borrower, who is proposing the IVA, should not be concerned with their ability to pay the IVA fees and costs since they originate from ‘the IVA fund’ and don’t comprise an further burden to be borne by the borrower.
Providers which offer insolvency services such as Individual Voluntary Arrangements (IVAs) or other debt remedies do so as it’s a business and because they have an expectation of making a profit from the business. If they do not make a profit, then ultimately they go out of business. During the last few years, a number of IVA providers have ceased to trade for this very reason. For some of the insolvency firms which had to quit trading, the main root trigger was the decision of creditors to sharply reduce the fees that they were prepared to pay to the providers of insolvency services. That decision was taken about three years ago. One of the mechanisms used by lenders to attain fee reductions was to appoint and authorize agents who would act and vote on their behalf and handle the IVA proposals submitted by debtors and the insolvency companies who represented them. There are expenses in using the services of such agents but lenders thought that they would be self funding in that any money saved from reductions in IP fees would be more than enough to pay for the costs of agent services. On top of that lenders believed that there were efficiencies to be generated from the economy of scale which employing such agents would afford.
The agents would acquire skills in due course and would represent a wide range of lenders. They could standardize the approach to IVA proposals in the interests of the lenders whom they represented. Instead of a diverse bunch of creditors each trying to utilize their own often contradictory changes to a debtor’s proposal, they could engage the services of one or two agents. These agents would be able to standardize modifications to debtors’ IVA proposals and have the voting strength to get them approved. The vast majority of modifications have the aim of boosting the dividends to lenders by way of either raising the debtor’s contributions to the IVA or by reducing the administration costs of the IP or by a blend of both means. Utilizing agents like this had and still has a cartel like impact in so far as the interests of the creditors are merged and optimized and the interests of the debtor as represented by the IP are suppressed.
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