Syedur Rahman and Kate Cook take an in depth look at reasons for IVA termination, how the termination process works, and the options for debtors whose IVA has failed.
Published December 2023
References to schedules, sections and rules in this article are to those in the Insolvency Act 1986, and The Insolvency (England and Wales) Rules 2016.
What is an Individual Voluntary Arrangement?
An Individual Voluntary Arrangement (IVA) is a binding agreement between a debtor and their creditors. It is drawn up by an insolvency practitioner who acts as the IVA supervisor.
An IVA can be a good alternative to bankruptcy if the debtor has property or other assets that would otherwise be sold in bankruptcy.
The debtor normally makes monthly payments towards their debts for the life of the IVA, generally no longer than six years. Some IVAs are a mix of monthly instalments and lump sum payments. Payments are reviewed annually and may be changed if the debtor's circumstances change.
On average, 22% of all IVAs registered since 2013 have been terminated. 2022 saw the highest number of IVAs approved since 1990. With the current cost of living crisis, IVAs are more likely to fail due to debtors being unable to maintain agreed payments.
How and why does an IVA terminate?
Neither the Insolvency Act 1986 nor the Insolvency (England and Wales) Rules 2016 specifically provide for the termination of an IVA by the debtor or supervisor.
Most straightforward IVAs are drawn up according to the IVA protocol, unless the debtor has irregular income or complicated assets. The protocol sets out standards terms and conditions for the IVA. Over the years the Insolvency Service has updated the protocol to clarify how breaches can lead to termination.
The terms and conditions of an IVA will include default or breach clauses. When an IVA ends prematurely, the most common reason is that it failed because the debtor breached the agreement. Termination of an IVA does not automatically follow a breach.
A debtor will be in breach of their IVA if, for example, they are in arrears by three months, fail to notify the supervisor about receipt of an asset, or obtain credit without the written permission of the supervisor.
What happens when an IVA is breached?
Under Part 4 of the current 2021 Protocol Standard Terms and Conditions, the supervisor must notify the debtor of any breach as soon as possible by issuing a ‘Notice of Breach’. The debtor has one month to remedy the breach.
If the debtor remedies the breach
The supervisor takes no action if the debtor remedies breach. The breach does not need to be reported separately to creditors. The breach is detailed in the annual report sent to all creditors bound by the IVA.
If the debtor does not remedy the breach
The supervisor sends a report to all creditors if the debtor does not remedy the breach within one month. The supervisor can issue a ‘Certificate of Termination’ which confirms that the IVA ceases to have effect. Alternatively, the IVA terms could be varied, or the supervisor or a creditor could petition for the debtor’s bankruptcy.
A clause that allows the IVA supervisor to petition for the debtor's bankruptcy upon a failed IVA is not enforced automatically.
When the supervisor terminates the IVA
A supervisor who terminates an IVA has 28 days to give notice to the debtor and all creditors bound by the IVA. The notice must contain the reasons the IVA has been terminated so that all creditors are aware of the reason for the failure. This could be because either the debtor has breached the agreement, or they have asked the IVA supervisor to terminate it.
After an IVA has been terminated, creditors can pursue the debtor for payment. Any payments made to creditors during the IVA will be taken into account, however they can start to apply interest and charges again. They may also add backdated interest and charges for the period that the IVA was in place.
Chronology of events from breach to termination
If a debtor falls into arrears on their payments, the chronology of events from a missed payment to receiving a Certificate of Termination is as follows:
The debtor must have defaulted on payments for at least three months
The supervisor will send the debtor a Notice of Breach
If the debtor does not remedy the breach within a month, the supervisor reports this to creditors within the following 28 days and either issues a Certificate of Termination or seeks creditor views
If creditors are consulted, they will decide whether to vary the terms of the arrangement, issue a Certificate of Termination or present a petition for the debtor’s bankruptcy
A debtor can ask the supervisor to terminate their IVA. The supervisor will then issue the Certificate of Termination, however the process may still take several months.
The timings for the issue of notices and certificates will be set out in the agreement itself. For a protocol compliant IVA, the whole process - from the first missed payment to the Certificate of Termination – can take around seven months.
This can delay the debtor's entry into another debt solution, such as a DRO (debt relief order).
After termination: implications and options for clients
When an IVA is terminated, the supervisor informs the Insolvency Service, which marks it as failed on the Individual Insolvency Register (the register). The record is removed three months after termination under Rule 11.15.
If the client’s IVA entry is incorrect, the client should ask the supervisor to amend it.
A debtor with a terminated IVA can explore alternative debt solutions. Commonly this will be a DRO or bankruptcy where the supervisor has not already served a bankruptcy petition.
Debt relief orders
A client is not eligible for a DRO if they are currently subject to an IVA. The Insolvency Service verifies this by checking the register.
If an IVA shows as current on the register when a DRO application is submitted, the application is declined. Because the IVA termination process can take several months, this causes problems for clients who want to apply for a DRO.
Evidence of IVA termination for the DRO team
The DRO guidance for debt advisers states that if the register shows the IVA as current, the Approved Intermediary must contact the IVA supervisor to obtain documentary evidence that the IVA has ended. They must send this to the DRO team at the Insolvency Service when the application is submitted. Guidance states the DRO team will accept:
a covering letter, which should reference rule 8.31
a certificate of termination under rule 8.31
a copy of the final report to creditors
final receipts and payments
Debtors who have no receipts and payments can explain the reasons in their covering letter.
Debt relief order guidance for debt advisers from the Insolvency Service is available on Gov.uk.
Options if a long delay prevents a DRO application
A client who is facing a long delay in getting their IVA terminated could ask the supervisor for updates every few weeks and request quick processing. They could ask for evidence that the supervisor has taken the steps required, such as issuing the Notice of Breach and Notice of Termination, within the required timescales.
The Statement of Insolvency Practice 3.1 (SIP 3.1) - a code of practice insolvency practitioners should follow - states that the supervisor should have procedures in place to ensure an IVA is closed promptly on completion or termination.
A client could consider a formal complaint about unacceptable delays to the insolvency practitioner and escalate it to the Insolvency Service Complaints Gateway if necessary. The Financial Ombudsman Service cannot consider complaints about the administration of IVAs.
Bankruptcy
A court can make a bankruptcy order against a client whose IVA has not been formally terminated. It does not matter if the Certificate of Termination has not been issued. The bankruptcy order normally brings the IVA to an end.
Any assets belonging to the client are likely to be held on trust by the supervisor. The IVA should contain details of the client’s assets and how they will be treated.
Where the IVA does not set out how the assets will be treated and the client is declared bankrupt, the courts have confirmed that a trust remains effective for the purpose of the bankruptcy creditors. The judgment in NT Gallagher & Sons is available on Bailii.
