Insolvency Made Clear: A Guide for Debtors

Alternatives To Bankruptcy
• IVAs typically last for a longer period than bankruptcy. Bankruptcy is over
in a year; IVAs are typically several years long.
1.1.2 Failure of the IVA
If a debtor does not comply with the terms of the IVA, the IVA is said to ‘fail’.
The effect of failure will depend on the terms of the IVA, but usually this results
in the supervisor petitioning for the bankruptcy of the debtor. A supervisor can
petition for the bankruptcy of the debtor if they can show that the debtor has
failed to comply with the IVA’s terms; that the debtor submitted misleading or
false information in support of the IVA; or that the debtor has not complied
with the reasonable requests of the supervisor (s276 of the Act). The creditors’
position is also likely to be determined by the terms of the IVA, but the default
is usually that they are no longer bound by the IVA.
In exceptional circumstances, the court can order that the IVA should continue
despite the debtor’s breach. This can be, for example, on the basis that the IVA is
still in the best interests of creditors. However, the court’s starting point will be
that if the debtor agreed to the IVA, and the IVA has specific provisions dealing
with its failure, then the debtor should be bound by the agreement. A debtor
cannot rely on the court’s discretion to dismiss a bankruptcy petition in these
circumstances.
If one IVA fails, or if it seems likely to fail, it is possible to pass a second IVA provided
creditors vote for it. The rules for a second IVA are the same as the first.
1.1.3 Conclusion
From the perspective of a debtor who cannot pay their debts, an IVA is likely
to be the best route out of their financial difficulties. However, it is not within
the debtor’s power to enter into an IVA by themselves: they need 75% of the
creditors by value to agree as well. Most of this book concerns situations where
the creditors (or at least more than 25% of them by value) insist on presenting
a bankruptcy petition. However, a common litigation tactic for debtors is to
make an IVA appear more attractive in order to settle the claim. As will be discussed,
a bankruptcy petition must be dismissed by the court or withdrawn by
the petitioner if an IVA is agreed. Part of the strategy of a debtor is likely to be to
promote an IVA, and so the route should never be closed. It follows that making
a threat of the form “if you do not agree by a certain date, I will withdraw the
proposal” is likely to be counter-productive.
1.2 Debt relief orders
Debt relief orders (DROs) are an administrative scheme which allows debtors
with very little money to escape their debts. They can only be made when a
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