Despite considerable publicity
since the 1986 Insolvency Act was passed there still seems to be
some uncertainty about the benefits of entering into a Voluntary
Arrangement when a business runs into financial difficulty, especially
when compared with the Bankruptcy alternative. This may be due to
unfamiliarity with the procedures and possibly some reported malpractice
centring on fees.
Certainly
it's a business rescue procedure that is used more actively in
the South of England
than the North, but whether that¯s because entrepreneurial businesses
seek professional help sooner or because the professional market
promotes it more actively is a matter of conjecture. We hope this
article provides a better understanding of the benefits of an IVA,
when compared to bankruptcy - however, to ensure a viable business
rescue, an early introduction to an Insolvency Practitioner is a
prerequisite!
Firstly, what are the typical kinds of business situations that are suitable
for an IVA; and when is Bankruptcy the more appropriate procedure?
Essentially, the underlying
business will be successful but experiencing serious cash flow for
some of the following reasons-
1. it
may have suffered a large bad debt
2. an
onerous loss making contract may have emerged
3. exceptional
expenditure on a major asset (emergency repairs on plant or machinery
or property) not budgeted for
4. losses
judged to be temporary as a new competitor enters the market and
takes share
5. a
loss making department or subsidiary emerges putting severe strain
on the main business
6. the
withdrawal of financing facilities ¡ supplier company insisting on
reduced settlement terms or debtor company insisting on extended
terms - factoring company excluding a substantial debtor for risk
reasons
On the other hand, Bankruptcy
will be more appropriate for those businesses that have severe cash/credit
problems and where there are no grounds for believing the business
could return to a profitable state whatever action is taken - even
the injection of capital!
So, what are the advantages
of an IVA over Bankruptcy?
IVA
|
BANKRUPTCY
|
| 1. The individual retains greater control
of their assets
2. The individual can often retain a greater proportion
of their income
3. Depending on the proposal,
the matrimonial home may be protected
4. Creditors are usually offered
a higher return
5. An IVA avoids the stigma of Bankruptcy
6. There are no restrictions on trading
7. There are no restrictions
on obtaining credit
8. Any Professional status is
retained
9. The are no investigations
into antecedent transactions
10 There can sometimes be tax benefits
11. It may be an appropriate procedure if there has been
a previous bankruptcy |
1. Automatic discharge, generally after
3 years (or 2 years in smaller cases) - unless there has been
a previous bankruptcy within the previous 15 years.
2. When discharged certain assets
(eg pensions, homes and trust funds) acquired previouslyÉ and
which have not been realised are still controlled by the
Trustee and may
be realised any time in the future.
|
What are the disadvantages of an IVA when compared to Bankruptcy
IVA
|
BANKRUPTCY
|
|
1. The period of time under supervision will be as long as agreed by the
creditors - generally 5 years but could be longer.
|
1. Control of assets automatically passes to the Official Receiver or the
Trustee in Bankruptcy. The business will normally cease immediately
2. Individuals income subject to the discretion of the Trustee
or The Court
3. The Matrimonial home, subject to the discretion of the
Court, is often sold
4. Professional status is generally withdrawn, and will often
make it impossible to earn a living in that profession
5. Although the individual has the ability to trade and open
a bank account, banks are generally reluctant to open business
accounts, when they do, debit cards and cheque guarantee cards
are seldom available
6. There is a restriction on obtaining trade credit
7. If the individual trades in other than his own name, the
matter of his bankruptcy must be disclosed
8. The individual cannot act as a director of a company,
without the Court's permission
9. The trustee conducts an investigation into the reasons
for the business failure and which might give rise to the disclosure
of fraudulent actions which might give rise to imprisonment
or fines
10. There are more statutory costs to Bankruptcy - particularly
Secretary of State fees and banking costs in the Insolvency
Service account.
|
A comparison of procedures
IVA
|
BANKRUPTCY
|
|
1. The individual prepares a proposal, often assisted by an IP and who is
often the Nominee on whom the proposal is served
2. Within 7 days a statement of affairs is prepared and delivered
to the Nominee
3. Application is then made to the Court for an Interim Order
and which protects the individual from bankruptcy proceedings
whilst the proposal for an IVA is being considered
4. The Nominee files a report on the proposal at the Court
recommending implementation of the IVA before the granted expiry
date of the interim order
5. After a period of between 14 and 28 day, a Creditors meeting
is held to consider the proposal - providing 75% in value of
those attending agree, then the proposals are binding on all
the creditors and the IVA is implemented
6. The Nominee now becomes the Supervisor whose role is to
oversee the implementation of the terms of the IVA proposals
are adhered to.
|
1. The debtor files a Petition and a Statement of Affairs on the grounds
that he is unable to pay his debts
2. If the aggregate amount of unsecured
debts is £20,000
or more the Court will either make a Bankruptcy Order or dismiss
the Petition
3. If they are less than £20,000, and there are at
least £20,000 worth of assets, and the debtor has not
been subject to any insolvency procedures in the past 5 years,
the Court will appoint an IP to investigate the feasibility
of an IVA. If that report is negative then a Bankruptcy Order
will be made and the Official Receiver will act as Trustee
as an alternative to the IP acting as Trustee; the IP may be
appointed to realise the assets and make payments to creditors.
4. Discharge is automatic after 2 years
|
Costs Comparisons
|
IVA
|
BANKRUPTCY
|
|
Fees will vary depending on the complexity of the business
problems and the reliability of financial data.É There
will be a fee in respect of preparing the proposals, as a guide,
a typical straightforward case would be £1,000 with on-going
fees in respect of the supervision - typically £50 per
month. There will probably be legal costs - typically £500.
|
Deposit and Court Fees £370.É Official Receivers
costs - typical straightforward case £500.É Trustees
costs - there is a scale rate; a typical case with £20,000
assets would be approximately £3,500 with disbursement
costs.
|
It can be clearly seen,
that for a business that has a viable future, the best solution for
all parties - creditors, the businessman, his family and his employees,
an IVA has distinct advantages. He stays in control of his future
and although his personal lifestyle may have to change to enable
the voluntary arrangement to be carried out successfully, he avoids
the real stigma of Bankruptcy and all that goes with that procedure.
Whilst the costs of the procedure can be higher than bankruptcy,
they are part of the continuing costs of running the business and
providing it makes profits, are tax deductible.
To be successful there must
be early consultations with an Insolvency Practitioner as soon as
the viability of the business becomes doubtful, and when there will
be more options and time to develop a sound case to put before the
Court and the Creditors.
If you are a businessman,
or a professional with a client experiencing financial problems or
have problems emerging, please speak to Jeremy Priestley at Poppleton
and Appleby on 0114 2755033.
February 2001
Please note that whilst
we have tried to give an accurate comparison between the two procedures
in "layman¯s language" - in no way should this be construed
as a legal template to be followed - the procedures are complex and
businesses with problems must always seek the advice of a professionally
qualified insolvency practitioner.
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