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Court orders IVA should continue despite default petition...

An Individual Voluntary Arrangement (IVA) is generally considered to have come to an end where the debtor is in breach of its terms and in most cases the debtor will be declared bankrupt on the IVA Supervisor’s petition. 

When is an IVA in default?

Section 276(1) of the Insolvency Act 1986 (Act) says that IVA is breached when the debtor: -

  • fails to comply with his obligations under the IVA, or
  • submitted false or misleading information to the supervisor, or
  • failed to do something that was reasonably requested of him by the supervisor.

The court needs to be satisfied on at least one of them before it can make a bankruptcy order.

What happens if the IVA is defaulted?

The supervisor of an IVA can petition for a debtor’s bankruptcy under section 264(1)(c) of the Act.  The IVA will in most cases set out the consequences of a breach in the IVA including whether or not the supervisor should (or possibly must) petition for the bankruptcy of the defaulting debtor.  

Does a supervisor’s petition mean a bankruptcy order must be made?

It is generally accepted that where the court is satisfied that one of the grounds in s. 276 has been shown it will make a bankruptcy order, but it does not have to. 

Section 276(1) states that the court must not make a bankruptcy order for default in connection with a voluntary arrangement unless it is satisfied that one of the grounds in s.276(1)(a), (b), or (c) have been established.  It does not say that the court must make the order.

In Kaye v Bourne [2004] EWHC 3236 (Ch) the Supervisor of an IVA had petitioned for the debtor’s bankruptcy for failing to make certain monthly instalments, failing to account to the supervisor for an inheritance, and failing to take action to recover a debt.  The Supervisor was required under the terms of the IVA to petition for bankruptcy.

The Court at first instance decided that IVA should continue despite a breach of its terms because it was still in the creditors’ best interests to do so and awarded the debtor 50% of his costs for successfully resisting the petition.

On appeal the High Court upheld the decision finding the court was entitled to conclude that the IVA was the best way forward having considered the evidence and the reasons for the making of the petition.  It did however overrule the decision on costs, awarding costs in the petition to the Supervisor on the basis that it was the debtor’s default that had caused the petition to be made.

Comment

In practice, supervisors’ petitions on default of an IVA are often unopposed and the bankruptcy order is made.  However, where a debtor does oppose the petition the courts can order that the IVA should continue.

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