Trends in bankruptcy—are IVAs here to stay?

Recent statistics from the Insolvency Service show that the number of corporate insolvencies has continued to decline, but what do the figures tell us about the future of personal insolvencies in England and Wales? Stephen Leslie, a senior associate in the restructuring and insolvency team at Shoosmiths LLP, considers the issue.

Original news

Press Release: Official statistics on insolvencies in England and Wales for the period April to June 2014

While company liquidations have decreased, the number of people who became insolvent in England and Wales increased when compared with April to June 2013. This has been attributed to an increase of one-fifth in the number of individual voluntary arrangements, while the number of bankruptcies and debt relief orders decreased.

So does that mean that more people are now going bankrupt?

Put simply, no. The number of bankruptcies decreased from Q1 2014, and were down 15.9% on Q2 2013. The number of debt relief orders (DROs) increased nearly 7% from Q1 2014, but was still 1.8% down from Q2 2013.

That, therefore, leaves individual voluntary arrangements (IVAs), which saw an increase of 14.6% on Q1 2014, and are up 20.3% on Q2 2013. These increases were sufficient to increase the overall number of people who have become insolvent.

The increase of 20.3% in the number of IVAs from Q2 2013 is represented by 2,455 IVAs. The total number of IVAs in Q2 2014 (14,571) was the highest number of any quarter since they were introduced in 1987.

So why have the number of IVAs increased?

What the statistics do not say is whether the number of IVA proposals put forward by debtors has increased, or whether the rate of approval of IVA proposals has increased, or both.

There have been no recent material changes in law regarding the process of a debtor entering into an IVA, and so that cannot be a reason.

IVAs are debtor-led, in that a creditor cannot force an IVA on a debtor, although IVA proposals are usually borne out of creditor pressure being applied. Accordingly, if the number of IVA proposals put forward has increased, it would be reasonable to conclude that debtors are more confident of being able to enter into longer term payment plans and, more importantly, adhering to them. This is perhaps due to perceived job security, and optimism of the wider economy. There may also be a feeling that creditors are more likely to approve IVA proposals as an alternative to bankruptcy.

If it is the case that the rate of approval of IVA proposals has increased, it would perhaps indicate that creditors are focussing more on the likely return, even if an IVA is proposed to last the full five-year period. The return should not of course be looked at in isolation—an IVA proposal will be promoted to creditors on the basis of a better return than if the debtor entered bankruptcy. The surplus income of a bankrupt can only be collected for three years under an income payments agreement or order, as opposed to up to five years in an IVA. Further, notwithstanding the well-publicised increase in house prices in London, house prices in some areas of the country have remained stagnant or have seen only minimal increases such that there may only be limited or no equity in a bankrupt’s property, which would usually be the main asset in their bankruptcy estate. The costs of administering a bankruptcy estate are also higher, even more so given the increase in April 2014 in the fees charged by the Insolvency Service.

Is the number of IVAs going to continue to increase?

In the right circumstances, IVAs can work well, but for those which are planned to last for five years and are based on contributions from salary, a degree of risk is introduced as to whether those contributions can be maintained. For example, for those debtors with a mortgage, the expected rise in interest rates—possibly as early as February 2015—could impact on their ability to pay contributions into their IVA. Although you would perhaps expect that appropriate provisions would be built into a debtor’s IVA in this regard, or that a variation to the IVA could be sought at the relevant time, the debtor’s default of an IVA might lead to bankruptcy.

That said, if a debtor is insolvent, other than the debtor and their creditors taking no action whatsoever, the only other available options are DROs, IVAs and bankruptcy. The government has seemingly indicated its preference for DROs and IVAs by its announcement on 6 August 2014 that it is considering plans to increase the bankruptcy debt threshold from £750, and is seeking views on how DROs can be improved. In addition, insofar as a creditor commencing bankruptcy proceedings against a debtor is concerned, the court fee and Official Receiver’s deposit were increased in April 2014.

It would be fair to assume that, when taking all of the above into account, we will continue to see an increase in the overall number of IVAs being approved, at least in the short-term. Any material increase in the value of debtors’ homes may mean that bankruptcy becomes a more attractive proposition over time, especially in the event that a debtor is unable to raise finance in order to realise the equity in their home.

Further reading

If you are a LexisPSL Subscriber, click the link below for further information on personal insolvency and IVAs:

How to present a bankruptcy petition and the documents you need to complete (Subscriber access only)

What is an individual voluntary arrangement and what does it seek to achieve? (Subscriber access only)

Not a subscriber? Find out more about how LexisPSL can help you.

Interviewed by Anna Jeffrey.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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