A voluntary arrangement is a legally binding agreement between a debtor and their creditor to write off part of the debt owed. Voluntary arrangements can also mean paying back the amount owed over an extended period of time, and usually include freezing any interest.

A debtor is the term used to describe a private individual (so someone not in business), a sole trader, partnership or limited company. This means that every type of business can have a voluntary arrangement. The types of voluntary arrangement available are an individual, partnership or company voluntary arrangement.

What happens in a voluntary arrangement?

The procedure for a voluntary arrangement is the debtor choses a licensed insolvency practitioner who helps the debtor to put together a document called a proposal. This document is sent to the creditors, giving them 14 days’ notice of a meeting to make a decision.

The proposal to creditors contains the following information:

• a brief financial history
• a summary of what assets are owned and the amounts due to creditors
• a proposal to creditors of how much they will be repaid, and when
• the terms and conditions

There is no fixed proposal set by law – it can be whatever the debtor can reasonably afford to offer. As an example, it might be an offer of just 30% of the amount owed, with interest frozen over five years.

Entering into a voluntary arrangement

To be an approved and legally binding agreement, it must be accepted by 75% of the creditors that vote. The creditors that do not vote do not count. Creditors have a vote based on how much they are owed.

If the proposal is approved, it binds in every creditor, even if they rejected it.

Sometimes, creditors will vote to approve a proposal, but with modifications. The debtor must accept these if they want to be able to count these votes as a ‘yes’. A typical modification may be to extend the term from three years to five years.

All debts can go into a voluntary arrangement, except secured debts such as a mortgage, hire purchase, spousal maintenance or court fines.

About the author

David Kirk is a chartered accountant and licensed insolvency practitioner based in the south west. Follow @kirksinsolvency or visit www.kirks.co.uk.