Are you a creditor who has been forced into a dubious “voluntary arrangement”?
An individual voluntary arrangement (known as an “IVA”) is a formal agreement between an individual debtor and their creditors that the debtor will pay an agreed sum of money to their creditors, usually by instalments over a period of years, in full and final satisfaction of their debts. An IVA is often proposed by an individual to avoid bankruptcy and, to be approved, it requires the approval of 75% in value of the creditors voting on the proposal. If approved, all relevant creditors are bound by the IVA, including those who voted against the proposal or who did not vote at all.
In many cases, creditors bound by an IVA will only receive a fraction of the total sum owed to them. However, the debtor generally seeks approval by attempting to show that the creditors will ultimately recover a greater proportion of the debt owed than if the debtor is adjudicated bankrupt.
One issue that concerns many creditors in the context of an IVA proposal is a suspicion that the debtor has not been fully transparent in their proposal and has failed to disclose relevant assets and/or voidable transactions, which would result in more assets being available to creditors if the debtor was declared bankrupt. In the case of a creditor who is owed 75% or more of the individual’s total debts, an easy solution is available – they can simply veto the proposal. However, what about a minority creditor who sees a dodgy IVA being approved against their wishes or a majority creditor who discovers undisclosed assets or voidable transactions after the IVA has already been approved?
The main basis for challenging a decision to approve an IVA is set out in Article 236 of the Insolvency (Northern Ireland) Order 1989 (the “1989 Order”). Under Article 236, the decision can be challenged on either or both of two grounds: (i) that the IVA, as approved, “unfairly prejudices” the interests of a creditor; and/or (ii) that there has been some “material irregularity” at, or in relation to, the creditors’ meeting at which the proposal was approved. It is well established that a failure to disclose relevant assets or voidable transactions in an IVA proposal constitutes a material irregularity but a creditor must act quickly if they wish to bring a challenge under Article 236. In this regard, the relevant application must be made within 28 days of the report of the creditors’ meeting to the High Court or, in the case of a creditor who did not have notice of the meeting, within 28 days of the date on which they became aware that the meeting had taken place (Article 236(3) of the 1989 Order).
If a creditor misses the 28 day time limit for making an application under Article 236 of the 1989 Order, all is not lost however. In the first place, the Court has discretion to extend time for an application under Article 236. More significantly, where a debtor has failed to disclose relevant assets or voidable transactions in their IVA proposal, a disgruntled creditor may still be able to petition for the debtor’s bankruptcy under Article 238(1)(c) of the 1989 Order. The Court can make a bankruptcy order on such a petition on a number of grounds, including that the debtor has given materially false or misleading information to their creditors, or information which contained material omissions, in the IVA proposal or in connection with the meeting of creditors (Article 250 of the 1989 Order). It is important to understand that this is different from a challenge to an IVA under Article 236 and the 28 day time limit does not apply. Where a debtor is adjudicated bankrupt in such circumstances, this does not terminate or invalidate the IVA. However, creditors bound by the IVA can still prove in the bankruptcy for so much of their debt as remains unrecovered after completion of the IVA.
In addition to the above remedies, other options may be available to creditors in particular cases. For example, they may be able to challenge certain arrangements on the grounds that they are ultra vires the creditors’ meeting, they may wish to take or fund action to reverse various purported transfers of assets or they may wish to encourage a criminal prosecution of the debtor under Article 236A of the 1989 Order. However, in all cases where creditors have concerns that a debtor has failed to disclose relevant assets or voidable transactions in their IVA proposal, proper legal advice should be obtained without delay to ensure that creditors have the full range of options available and to ensure that appropriate action is taken before any relevant assets are dissipated beyond recovery.
NOTE: Companies can enter into a similar form of arrangement, known as a Company Voluntary Arrangement (or “CVA”). However, CVAs are outside the scope of this particular note.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.