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A consultation paper issued by the Insolvency Service

Comments from ACCA
October 2005

Executive Summary

ACCA considers that the individual voluntary arrangement (IVA) concept remains useful in that it offers the combination of flexibility and legal certainty which is not available to debtors via informal debt management procedures. That being said, given that the IVA has over the years been relatively little-used, it makes sense to review whether the structure of the procedure can be amended so as to make it more attractive and relevant to its target ‘market’.

We believe that the recent upward trend in levels of ‘consumer IVAs’ is likely to continue. We also consider that the proposed new Simple IVA (SIVA) procedure, aimed at smaller debtors, will prove attractive to debtors and to enough insolvency practitioners (IPs) to make the new vehicle work.

One of the undoubted strengths of the IVA procedure is that each case is supervised by a qualified and regulated individual. We believe that the quality of administration of individual insolvencies stands to improve if the current IVA procedure is extended by making it more relevant and attractive to small debtors. We consider that this outcome would be very much in the public interest.

If the rights of creditors are to be reduced in relation to SIVAs, and if they have to rely on the nominee to put forward the best proposal possible for them, this makes the role of the nominee/supervisor in presenting the proposal and implementing it all the more crucial. There will have to be clear statutory obligations imposed on the practitioner and sanctions for breach. At the same time, there need to be equivalent obligations and sanctions for debtors, in respect of disclosure and concealment of assets.

The input of the nominee in respect of the assurance to creditors that their interests will be better served by a SIVA than by petitioning for bankruptcy is likely in fact to be the pivotal feature of the SIVA. At present, IVAs often achieve this positive result by virtue of the successful implementation of the arrangement. But it will be an altogether more problematic and onerous exercise to require the nominee, before the event, to provide this assurance by law. An initial interview with the debtor, for example, may not give clear answers as to whether there will be ‘rights of action’ (preferences, transactions at an undervalue etc).

Given the emphasis in the consultation document to the creditors placing their ‘trust’ in the nominee to give them a better result than they would get from bankruptcy, there is the issue of liability of the nominee to creditors for a disappointing result. If IPs are to be encouraged to take on this work, we suggest there will need to be some provision whereby the nominee’s assurance to creditors takes the form of him being satisfied that a SIVA would be in the financial interests of creditors on the basis of the information available to him, including all the information which the debtor is required to provide to him.

The issue of cost will be critical to the success of the SIVA. The Green research has stressed that the cost of formal voluntary arrangements is currently a major deterrent to small debtors and in some cases to their creditors. Any revised IVA procedure needs therefore to incorporate elements which will reduce costs while at the same time ensuring reasonable protections for creditors. While face-to-face interviews will in some cases be necessary for the purpose of enabling the IP to give best advice on the debtor’s options, we suggest that these may not be necessary on every occasion – this is one area where cost reductions can be achieved.

We believe that the definition of a case constituting a “Simple” IVA is vital as the framework suggested is geared towards a consumer situation without many complications such as property matters. We would be interested to know what proportion debtors’ circumstances fit a simple scenario where the framework and the costs envisaged are appropriate.

The document does not expressly address whether the debtor or nominee would have the option of pursuing a full IVA rather than a SIVA if they considered it more appropriate.

Responses to Specific Questions

 

Q1 Do you support the introduction of SIVA 1?

Yes. We accept the argument made by Green and the working group that one of the reasons creditors will sometimes reject workable IVA proposals is because they think that the cost of the procedure will absorb too great a proportion of the realisations. Provided that the nominee in all cases makes an informed judgment to the effect that the returns for creditors in an IVA are likely to be higher than they would be in the case of bankruptcy, we agree that this would be a justifiable alteration to the current powers of creditors.

Q2 Do you agree that the proposed SIVA 1 scheme should have a maximum debt limit of £25,000/£30,000?

This figure may be seen as being quite high. But whatever financial threshold is chosen, it should be done with the aim of making the IVA procedure more attractive to small debtors who do not currently consider this option. If the research suggests that £25-£30,000 is an appropriate threshold for this purpose, then that would be a reasonable level. An alternative would to align the SIVA1 threshold with the county court administration threshold, so as to create a level playing field between the two procedures.

Q4 What are your views on the removal of a creditor’s right to vote in a SIVA 1?

On the face of it, removing the creditors’ right to vote will conflict with the essence of a voluntary ‘arrangement’ between a debtor and his creditors – a SIVA 1 will be imposed on creditors, rather then them being willing parties to it. In these circumstances, if creditors are to be bound into an IVA without being able to vote on it or modify it, there will have to be a significant onus on the nominee to ensure that the debtor is credible, the proposed arrangement is workable and the interests of creditors will be served by the SIVA 1. We support the measures outlined in paragraph 32 to that effect. There will additionally be a need for detailed guidance on the extent of a nominee’s responsibility to investigate the debtor’s circumstances. It is only by issuing firm guidelines on this that Insolvency Practitioners will be encouraged to undertake the role of Nominee where the costs of this are limited. With regard to the features of the SIVA 1 outlined in paragraph 33, it is not clear what exactly the role of the nominee would be in the initiation of the procedure. It is stated that one of the features of the SIVA 1 should be that the returns in it must be higher than those in bankruptcy. It should be clarified whether this means that a) the nominee must satisfy himself, at the outset, as to whether the returns are likely to be higher than they would be in bankruptcy, or b) where returns turn out to be lower than they would be in bankruptcy, the SIVA 1 is revoked. We suggest that a) is the correct alternative.

Creditors are also entitled to receive meaningful disclosures and there should be sanctions provided for in respect of misleading information and non-disclosure on the part of the debtor.

Q5 Do you support the introduction of the SIVA 2?

Yes.

Q6 Do you agree that the proposed SIVA 2 scheme should have debt limits of between £25,000-£30,000 and £75,000?

As with our response to Q2 above, if the research indicates that £75,000 is a valid cut-off point at which to distinguish ‘trade’ IVAs from simpler consumer insolvencies, then we would accept that figure.

Q8 If a SIVA 1 or SIVA 2 has failed, should the debtor be barred from proposing another SIVA 1 or SIVA 2 for a specified period and what length should that period be?

A blanket ban would assume that the debtor himself was always responsible for the failure of an arrangement. Where a debtor is responsible, then we would support a ban. But it is not always the case that the debtor is directly responsible – there may be other circumstances beyond his control. For this reason it may be unfair to impose an automatic ban without any assessment of the reasons for the failure. We would favour the taking into account of the level of the debtor’s own responsibility for the failure. There needs to be formal provision for the nominee to do this.

Q9 Should a SIVA 1 or SIVA 2 failure prevent a debtor from proposing an IVA?

As with our response to the previous question, we do not think it necessarily follows that the failure of an arrangement will always be the direct responsibility of the debtor.

Q10 Do you agree that there should be no prescribed minimum dividend in a SIVA 1?

We can see an argument for imposing a minimum dividend, set at the right level, where the SIVA is simple. In other EU states which have introduced a minimum level, the uptake has tended to be low, but sometimes the reason for this is that the minimum level has been set too high. Commercially minded creditors are, after all, invariably interested in how much dividend they are going to receive and by when. On the other hand, we would not wish to engineer a situation whereby a debtor is allowed to arrange his affairs so that he delivers only the minimum dividend that he is required to do – no debtor will wish to pay more than he has to.

Q11 If you think that there should be a minimum dividend, what level would you suggest?

We suggest it could be set at around 20%. At present personal credit creditors tend to reject VAs with less than a 25% return.

Q12 What practical suggestions would you offer to increase awareness of IVAs?

We suggest that it could be made obligatory for county/high courts to make reference to them. Bankruptcy petitions could also make reference to them. It would also be useful to raise the general level of awareness of IVAs among accountants, financial advisers and, debt advisors. The Insolvency Service web site could also be a useful resource.

Q13 Do you think the IVA should be renamed?

No. What is more important than superficial brand recognition is the actual usefulness of the procedure.

Q14 Do you think that identifying whether a practitioner specialises in corporate or individual cases (or both) would be beneficial?

We agree that there is potential in this idea as a means of adding to the information in the public domain about voluntary arrangements. But it should be possible for individual IPs to be able to list all the services offered by their firms, not necessarily the services they are prepared to provide themselves personally.

Q16 Do you agree with the introduction of a standard Executive Summary?

Yes, we agree that this would help to crystallise the issues and be of help to creditors. Of the two alternative forms of executive summary presented in Appendix 3, we would prefer example 1, since the structure of the financial information is clearer. The narrative information, if presented concisely, may also be of help to creditors in approving a SIVA 2 or IVA.

Q17 Would you welcome the introduction of an executive summary for existing IVAs?

Yes. Many firms are doing this already in any case – ACCA is encouraging them to do so, for the benefit not only of creditors but themselves.

Q18 Should there be an industry-wide set of STCs for SIVA1 and SIVA2?

We support the idea in principle although the document does not explain how the standard set would be enforced – would this be via legislation, professional guidance or some other means? Clearly, any STCs for SIVAs must be proportionate and accessible. The possibility of IP SIP9 fee guidance being made accessible through the internet rather than sent out in hard copy each time has been discussed favourably within the profession).

Q19 For existing IVAs, should there be an agreed and publicly available set of STCs so that each proposal which is sent to creditors does not have to include a printed version of them?

Paragraph 49 stresses that the primary goal is to reduce the length of the STCs by concentrating on those debtors with relatively low levels of undisputed and unsecured debt. For debtors with more complicated financial situations, the proposal may need to be customised. For this reason, we would not support the STCs being made mandatory to IVAs proper.

Q20 Do you agree that, if SIVA 1 and SIVA 2 are introduced, and provided the nominee has made adequate checks for identity, then a face-to-face interview with the debtor should NOT be required?

Whether or not the practitioner should meet with the debtor beforehand has of course been an important and sensitive issue for the profession in recent years.
The practitioner will have a initial responsibility to identify a new client under Money Laundering Regulations. But the question of whether he needs to actually meet with the debtor beforehand as part of the process of arriving at a view on the appropriateness of an SIVA is separate from the basic identification requirement. Clearly, in order to form the required view, especially because of his responsibility to creditors, the nominee will need to process and analyse information about the debtor’s circumstances. Although cost reduction should not be presented as the decisive factor in answering the question posed, we believe that it is an important consideration within the overall rationale of the new procedure. In our view, it would not be appropriate to impose an automatic requirement on the nominee to meet with the debtor in every case. There will certainly be some cases in which it will be appropriate, but we believe it will be sufficient to leave the decision as to whether to arrange a face-to-face interview with the nominee. Given the nominee’s statutory responsibility to satisfy himself that a SIVA would be a good deal for creditors, and given his potential civil liability to them in the case of defective advice, we do not believe that any nominee would take this matter lightly. It should therefore be left to the nominee to determine the steps he should take in individual cases to arrive at this view as to the appropriateness of a SIVA for each individual client. Guidance could be given as to the areas which an IP may consider when making this decision.

Q22 Do you believe that a debtor can be offered best advice without a face-to- face meeting?

Yes, provided the nominee has all the information that he needs and there is full disclosure on the part of the debtor.

Q23 Do you believe that the nominee can assess a debtor’s understanding and commitment to the process without a face-to-face meeting?

In the absence of mandatory meetings, alternative steps would have to be taken to ensure that the debtor understands the implications. As we understand it, the Official Receiver conducts telephone ‘meetings’ with prospective bankrupts and these appear to work satisfactorily. We believe that a reasonable level of understanding can be reached through a telephone discussion.

Q24 Do you consider that a supervisor should always retain funds to petition for bankruptcy?

Yes. We would suggest that the procedure for petitioning for bankruptcy in an SIVA failure should be streamlined to reduce the costs and therefore the funds required to be retained by a Supervisor.

Q25 Should work be undertaken to establish whether a (low cost) insurance policy covering the costs of petitioning for bankruptcy is feasible?

We suspect that the difficulty of evaluating the risks involved will make this difficult to work in practice. Nevertheless, we would encourage the Insolvency Service to explore the option further.

Q26 Should the supervisor be given the discretion not to petition for bankruptcy in cases where there has been no wilful default by the debtor?

This should be allowed but not obligatory in all cases.

Q27 Should a petition for bankruptcy be mandatory, regardless of funds, where there has been wilful default?

Yes – this makes it all the more necessary that funds are reserved at the outset and held separately for the purpose. This could be streamlined by giving notice to the debtor that the default is considered wilful and allowing a period for appeal.

Q28 Should the debtor’s interest in the home be totally excluded from any SIVA proposal in any circumstances?

No.

Q29 Should there be a de minimis level set (and at what amount) for excluding a debtor’s interest in the home from SIVA1 and SIVA2 proposals?

No.

Q30 Should the debtor’s interest in the home be determined and dealt with at the IVA proposal stage and not revisited?

We believe there is merit in this idea. The advantage would be that there would be certainty and creditors would be insulated from any downside variation in the value of the property (although they would not be able to share in any positive variance in value). A big practical problem with IVAs is the uncertainty, for debtors and creditors alike, which arises from the revaluations take place some time into the arrangement.

Q31 Do you agree with a very simple windfall clause that captures £500 or more?

Yes.

Q32 Can you provide practical examples of where windfalls have arisen and identify any other issues for resolution?

An example would be where the debtor is named as a beneficiary in a will. The issue in such cases is full disclosure by the debtor to the supervisor. But any rules in this matter should take into account that the debtor is often not in a position to control or engineer the event which results in a windfall. We would question if it is appropriate in all circumstances for 100% of the windfall to be “seized” by the Supervisor. A common principle of an IVA is where the debtor is given rather more latitude than in a bankruptcy to encourage them to strive for a better future.

Q33 In routine and non-contentious matters in SIVAs, should the role of the court be removed?

There may be sense in retaining the involvement of the court albeit in a less prominent role. For example, there could be a provision for the court to intervene to deal with issues as they arise which cannot be resolved between the nominee and the creditors. One advantage of retaining court involvement is that the supervisor will be an officer of the court.

Q34 Does having a court-based, but not court driven, regime provide sufficient confidence in the proposed SIVA1 and SIVA2 regimes, particularly for creditors?

Yes.

Q35 Should a creditor’s right to propose modifications to SIVA1 and SIVA2 proposals be omitted?

We accept the argument that removing creditors’ rights to modify proposals will make the process of approval more straightforward. In the case of SIVA 1, if creditors have no right to vote on a proposal, it would make sense not to provide for any right to modify it either. In the case of SIVA 2, the argument that removal of modification rights will streamline the approval procedure may still hold. But there may at the same time be a risk that, by presenting the proposal on a ‘take it or leave it’ basis, creditors may be tempted to reject it and consider other options. It would be interesting to assess the experience of FTVAs regarding this matter.

Q36 Do you agree that there should be a standard approach in assessing a debtor’s allowable expenses?

We think this would be a good idea.

Q37 If so, is the CFS a reasonable benchmark?

Yes, although the Official Receiver’s methodology might be worthy of consideration as an alternative.

Q38 Do you agree that there should be a standard approach in assessing what proportion of disposable income the debtor should pay?

Yes, although it should not be mandatory to follow a prescribed approach. The debtor’s circumstances should always be taken into account.

Q39 Do you agree that in SIVA2 cases there is no need to hold a physical meeting of creditors?

Yes. This will offer the possibility of material cost savings. The Administration procedure has already incorporated such a reform.

 

Q40 Should there be a move towards a ‘paper meeting’ for the current IVA regime?

We would support this. Again, we would point to the experience of the administration procedure, where creditors have the option to convene a meeting if they wish to hold one.

Q41 Do you agree that a simple majority should be set as the requisite majority for approving a SIVA2?

Yes, provided that the nominee’s view that the proposal offers the prospect of better returns than bankruptcy is well-founded. (With respect to the majority required, we assume that the simple majority would be a majority of those actually voting).

 

Q42 What are your views on the suggestion that creditors must actively vote against the proposal in order that it is rejected?

We would not favour this. The onus should be on the supporters of the proposal to achieve the required majority. If opponents are to bound by a decision to approve the proposal, than this is not an unreasonable demand to make.

 

Q43 Do you think that excluding the votes of the debtor’s associates/relatives will cause a significant problem?

Not when they are close relatives or those who are heavily influenced by the debtor. But there is the possibility that some associates and relatives may be truly independent of the debtor and might become unfairly disenfranchised.

 

Q44 Do you agree that there should be an appeal route for creditors dissatisfied with a chairman’s decision to exclude certain classes of creditors from voting?

Yes.

 

Q45 Should the requisite majority for current IVAs be reduced to a simple majority?

Given that the focus of the current consultation is on fairly low-level consumer arrangements where there is a perceived need to reduce costs, we think that a separate case needs to be made out for more substantial, trade IVAs. We do not think that this case has been made in the consultation document.

Q46 Do you agree with the imposition of a 90-day time limit for the filing of creditors’ claims in SIVA1 and SIVA2 cases?

In principle, we agree with this. Many IPs have reported significant problems in getting IVA creditors to filing their claims. Setting a time limit could, therefore, help to address this problem. But there will need to be provision for creditors to make claims where the debtor failed to make proper disclosure of his liabilities at the outset. Such provision should reinforce a general requirement for debtors to make proper disclosure.

 

Q48 Do you agree that the supervisor should have the power to vary the SIVA within pre-determined parameters?

Yes. But an IP may still wish to obtain creditors’ approval on a discretionary basis.

 

Q49 If yes, at what level should these parameters be set?

We suggest that variations without recourse to creditors should be permitted provided that the dividend return did not deviate to more than a prescribed margin of the agreed return. A margin of 10% would appear reasonable. Again guidance would need to be issued to ensure that such variations did not become the norm.

 

Q50 What are your views on the use of electronic communication and payment?

Electronic means of communication are gradually becoming more widespread and business and it makes sense to at least recognise and encourage the use of such means, particularly if they are able to lead to cost savings for al concerned. But they should not be presented as the sole permissible means and hard copy alternatives must still be allowed for those who need or wish to use them.

 

Q51 Do you agree that IVAs, SIVA 1 and SIVA 2 cases would benefit from a simple and transparent fee regime for nominee and supervisor work?

We accept the comments made in the document about the concern about practitioners’ fees, and the effect this issue has for levels of take-up of the IVA procedure. The introduction of the new streamlined arrangements would appear to be a good opportunity to bring in a new, simple and transparent fee regime for SIVAs. But we consider that the added complexity of many IVA arrangements should result in those larger cases being excluded from any new regime.

 

Q52 Do you agree that the nominee work in an IVA, SIVA1 and SIVA2 case should be a constant figure?

Yes for SIVAs but not for IVAs.

 

Q53 If yes, what figure should be set for a single proposal in a SIVA1 and SIVA2?

We suggest £1,000 for a SIVA 1 and £1,500 for a SIVA 2.

 

Q54 What figure should be set for a joint proposal in a SIVA1 and SIVA2?

There should be allowed an uplift of 50% in respect of joint proposals.

 

Q55 For supervisors, do you prefer a monthly administration charge or a set percentage of realisations charge?

We are concerned to ensure that any fee regime retains the flexibility to deal with the variances that will almost invariably occur. We would take issue with paragraph 121 which suggests that the supervisor would only be entitled to receive fees where the debtor continues to pay into the arrangement – in fact, it is when the debtor does not comply with his obligations that the supervisor will often be busiest.

 

Q57 At what amount would you set the monthly administration charge?

It should be at least £50; usually more for an anniversary where reports are issued. Even at this level, the charge would exclude all but the volume players from this market – if it is considered to be desirable as a matter of policy to widen the scope of IPs becoming involved in this area, the level should be made higher.

 

Q58 At what levels would you set the set percentage of realisations?

We would support the sliding scale proposed by the working group.

 

Q59 Do you think that consideration should be given to adopting a set nominee fee for all IVAs?

We believe that this would be undesirable by virtue of the diversity of circumstances covered by full IVAs.

 

Q61 Are you in favour of reduced but more focused supervisor’s reports?

Yes.

 

Q62 What should be included in (or excluded from) a supervisor’s report?

The focus of reports should be on the return to creditors, particularly on dividends and their timing. This is the sort of information which will be of most direct concern to them. We would also suggest that some form of ‘outcome’ statement would be useful to creditors. Such a statement would identify any variance between the debtor’s commitments and his actual conduct. The statement could also include any general comments concerning the progress of the arrangement which the supervisor considered appropriate to make.

 

Q63 Should consideration be given to reduced but more focused supervisors’ reports in the current IVA regime?

Yes.

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