Are we bound by an IVA as a creditor for a subsequent debt?
Within this article we look at exactly how binding an individual voluntary arrangement (IVA) is when it comes to an individual’s creditors – with a particular focus as to how the Insolvency Act 1986 (section 260) operates for debts of individuals before and after the agreement of an IVA.
What is an IVA?
An IVA allows a person to compromise their unsecured liabilities or reschedule their repayment. The most common use of an IVA is when a person (the debtor) is in financial difficulty who wants to avoid bankruptcy. However, occasionally when a bankruptcy is still in progress and not final, also known as an undischarged bankruptcy, a person may use an IVA as a means of distributing their assets to creditors in an orderly way.
Who is bound by the terms of an IVA?
An IVA binds all creditors to consider the debtor’s IVA proposal, the debtor:
- Owes an obligation that is or would be a “bankruptcy debt” if the debtor was to become bankrupt,
- Is subject to an obligation that will lead them owing the creditor a debt in the future that would be a bankruptcy debt if the debtor went bankrupt.
The Insolvency Act 1986 (section 260) sets out that if an IVA is approved, it takes effect as if made at the time the creditors decided to approve it (s260 (2)(a)). The IVA binds every person who in accordance with the rules was entitled to vote or would have been entitled if they had had notice of the decision procedure (s260 (2)(b)).
In essence, all the creditors that could vote at the creditor’s meeting when the IVA was set up are legally bound by it. This is also the case even if they did not vote, or voted against the proposal, and means that they must stick to the terms and conditions outlined in the IVA. An IVA binds all creditors except:
- Certain orders relating to family support i.e. maintenance arrears and child support arrears,
- Student loans,
- Magistrates’ court fines,
- Social fund loans, and
- TV licence arrears.
Future creditors and contingent creditors
An IVA will bind contingent and future creditors, i.e. those whose debts are not currently owed at the time of entering into the IVA but may fall due. A future creditor is when an item or service is purchased and there is an agreement for it to be paid in the future, either by lump sum or in instalments. In contrast, a contingent creditor is where a debt is dependent on, or arises out of, an external factor such as litigation in which the damages awarded by a court would become a contingent debt.
However and in some cases critically, an IVA does not bind contingent debtors if the debt is unlikely to arise at the time of the debtor entering into the IVA. It will only bind a contingent creditor if, at the date of the creditors’ decision, there is an element of certainty that the contingent liability will crystallise.
Relevant case law
Further to the above, in the case of Peterkin v Merton London Borough Council [2011] EWHC 376 (Ch) it was indicated that the binding effect of the IVA scheme was not intended to cover future debts arising after the IVA was agreed. Thus, a creditor who had debts within the IVA was not precluded from using enforcement procedures such as charging orders to recover debts outside the IVA even though they arose during the currency of the IVA.
How can we help?
Prosperity Law LLP has specific expertise in advising a wide range of clients on matters relating to corporate governance, insolvency and bankruptcy.
For more information, please contact Simon Gerrard, Partner and Head of Insolvency, on 0161 667 3686 or at simon@prosperitylaw.com.
