A Voluntary Arrangement is, as its name suggests, an arrangement which an individual or a company enters into with its creditors.  An arrangement entered into by an individual is usually referred to as an IVA and an arrangement entered into by a company is usually referred to as a CVA. 

Whilst there are differences between how a company, or an individual, may enter into the Voluntary Arrangement, essentially the arrangement is not something which is ordered by the Court.  Although the Court is usually involved in the process of obtaining a Voluntary Arrangement, it is really up to the creditors to decide whether or not they wish to accept the proposal which is put to them.  In each case the proposal that the debtor puts to its creditors has been prepared in conjunction with an insolvency practitioner, who is referred to as the Nominee.  The purpose of the Voluntary Arrangement should be to give the creditors a better result than they would obtain if the company went into liquidation or if the individual was made bankrupt. 

Sometimes better results can be obtained purely by the fact that an individual may offer to make payments from their income for a period of 5 years, whereas if an individual is made bankrupt, they can agree to, or be ordered to, make payments from their income but only for a period of 3 years.

Sometimes a debtor's proposal will bring into account third party funds such as an agreement that a director will use his personal funds to help pay the company's debts.  Sometimes the benefits to the creditors may simply be that by avoiding formal insolvency proceedings, the individual or company can carry on trading and may be able to complete contracts which will bring in much needed funds  which can be used to pay the creditors.  If you are a creditor, it is likely that the first you will know about the voluntary arrangement is when you receive a pack of documents through the post containing the debtor's proposal of how they propose to deal with their debts. This should include where the money to pay creditors is to come from, what return they expect to give to creditors, with a comparison of how this would compare to formal insolvency proceedings and an invitation to the creditor to attend a meeting of creditors to be held, usually around 14 days after the creditors have been served with the relevant documents.  In most cases by the time the creditors are aware of the debtor's intentions it will be too late for them to take any action to recover their debt.  This is because many Voluntary Arrangements will impose a moratorium on creditors until such time as the outcome of the creditors' meeting is known.  During this time no creditor may commence proceedings, continue proceedings or commence or continue execution of any Judgment.

Even if there is no moratorium in place, it is highly unlikely that given the relatively short time between service of documents on the creditors and the date of the creditors' meeting that any significant steps can be completed, which might put the creditor in a more advantageous position.  However, this is a matter which should be considered on a case by case basis and depends very much upon the facts and the relative timescale.

Whilst creditors are invited to attend the creditors' meeting, the vast majority of creditors do not and simply return their proxy form indicating whether or not they wish to accept or reject the proposal and whether they wish to make any modifications.  If the proposal with or without modifications is accepted by a majority of creditors, which must be in excess of 75% in value of the creditors who vote, either in person or by proxy, then the proposal will be binding on all creditors so it is often in the interests of creditors who are strongly opposed to a proposal to attend the creditors' meeting to vote to reject the proposal and may be even to contact other creditors to see if they can influence the decision of any other creditors.  Equally, if a creditor wishes to approve the proposal then it is important to register that approval by attending and voting in person or completing and returning the proxy form.  It is not safe to assume that it will be okay because someone else will deal with this. 

If the proposal is rejected, then the moratorium comes to an end and creditors can commence or continue with whatever action or enforcement they are able to take against the debtor.  If, however, the proposal is accepted then the insolvency practitioner who has prepared the proposal is normally appointed the Supervisor of the Voluntary Arrangement and will become the person who ensures that the debtor keeps to the terms of the proposal. 

It is quite common for any proposal to contain provisions which say that in the event of a default that the Supervisor will petition for the bankruptcy or winding up of the debtor.  The Supervisor will normally make annual reports to creditors to let them know how the debtor is cooperating and what monies have been paid into the arrangement by the debtor and where appropriate may make payment to creditors from the funds available.

Very many Voluntary Arrangements for both individuals and companies are based on voluntary contributions from income.  In fact, these days they form the largest type of proposal.  Sometimes debtors can be overly optimistic about what cash they will have available to pay into the proposal and if the debtor is struggling to make the payment, then they can, as very many debtors do, simply ignore matters and bury their head in the sand or they can approach the supervisor to see if the creditors will consider a variation of the proposal.  It may be that there are very good reasons for the debtor being unable to keep up the payments originally promised, such as illness or loss of employment for an individual debtor, or a close member of the debtor's family who was taking on greater responsibility for family outgoings whilst the debtor's money was being put into a Voluntary Arrangement, or in the case of a company it could be that the company itself has fallen victim to bad debts or has lost an important order. 

It is always worthwhile considering approaching the creditors through the Supervisor for a variation as the alternative may be bankruptcy or winding up. 

If you want advice concerning Voluntary Arrangements or, as a creditor, have received notification that one of your debtor's intends to apply for a Voluntary Arrangement, you should contact Fiona Gaskell.  Fiona is a partner and dispute resolution solicitor at Clough & Willis