Differences between an IVA and bankruptcy

Under the Insolvency Act of 1986, as amended by the Enterprise Act of 2002 Part 10, there are two ways of handling insolvency: individual voluntary arrangement (IVA) and bankruptcy. Though both pertain to insolvency, there are differences between the two. Some of these are:

Legal differences

Basically, an IVA is an arrangement between an individual and their creditors while bankruptcy is a court order that affects both individuals and corporations. Although the IVA is a private matter between the debtor and his creditors, there is third-party involvement by the nominee or supervisor. A bankruptcy is an official court procedure with the involvement of a court-appointed receiver.

Initiation of Insolvency Proceedings. In an IVA, it is only the individual debtor who can propose an IVA. A corporation cannot propose an IVA, and neither can joint debtors such as partners in a partnership. In the case of joint debtors, each one will have to enter into IVAs individually.

For a bankruptcy, however, a petition to the court for the issuance of a bankrupt order may be presented by any of three parties: a creditor or a group of creditors acting jointly, the debtor, or the supervisor of a scheme previously proposed by the debtor. Once a petition is submitted, the court conducts a hearing.

Supervision of the process

Since an IVA is essentially a private transaction, there is a nominee (who can be a private person) who will supervise the negotiations between debtor and creditors. The nominee is involved before the IVA becomes final. The nominee in an IVA conducts an independent investigation on the debtor's affairs and lodges his report to the court. If it is necessary for the creditors to be called to a meeting, the nominee arranges the meeting, informs the creditors and chairs the meeting.

In a bankruptcy, the court conducts a hearing of the petition for a bankruptcy order, after which an official receiver is appointed. The receiver becomes involved after the bankruptcy order has been made. The official receiver must be a civil servant (an officer of the court or a government employee working with the Department of Trade and Industry) or a licensed insolvency practitioner. The primary duty of the receiver is to protect the assets of the debtor until the assets have been distributed to the creditors in payment of debts.

Results of supervisory action. The nominee in an IVA conducts the creditors meeting, under the rules governing such a meeting prescribed in the Insolvency Act. After this meeting, there is another hearing in court, at which the nominee makes a report on the results of the creditors meeting. Whatever is the outcome of the creditors meeting, the court will not take any further action on the IVA.

Once a bankruptcy order has been made, the receiver is now tasked to oversee the liquidation of assets and no more proceedings may be taken against the debtor or the assets he has surrendered. The receiver also makes a decision whether or not the business should continue to operate; if it does, a trustee in bankruptcy will be appointed. Such trustee must be a licensed insolvency practitioner.

Effect on assets

When a debtor proposes an IVA, he asks his creditors to accept payments which are less than full value of the debt as full and final settlement or deferred payments. He may choose to surrender all of his assets or he may propose something flexible enough to meet his particular circumstances. The proposal may consider his repayment capability as evaluated against income and assets, payments from other parties and combinations.

In bankruptcy, the debtor surrenders his assets. What remain with him are the basic necessities he needs to carry on and the tools of his trade (to enable him to continue having an income).