Who is eligible for a self-employed individual voluntary arrangement (IVA)? Michael Chamberlain, Insolvency Practitioner and Director at Chamberlain & Co, explains what you need to know about the self-employed and IVAs.

Who is eligible for a self-employed IVA?

People who are self-employed are able to propose an individual voluntary arrangement (IVA) to their creditors to compromise their liabilities.

There are no specific eligibility criteria for an IVA, however an Insolvency Practitioner (IP) will consider and advise on all the options available so that the debtor can make an informed judgement as to whether an IVA is an appropriate solution. The IP must satisfy themselves that the IVA has a real prospect of being accepted and that it strikes a fair balance between the interests of both the debtor and the creditors. 

As part of their advisory work the IP will consider any commercial contracts the debtor has entered into to assess whether these might terminate as a result of an IVA and how to deal with it.  They will also establish if the debtor is working in an occupation where they might be unable to trade whilst being subject to an IVA and how this can be mitigated.

How do you apply for a self-employed IVA?

To set up an IVA, you will need to instruct a licensed IP. They will undertake a fact-finding exercise and consider all aspects of your affairs and discuss all the options available to you.

If it is agreed that the best solution is an IVA, you would authorise the IP to act as your ‘Nominee’, and they would work with you to prepare an ‘IVA Proposal’ and convene the necessary ‘Decision Procedure’ with a view to obtaining approval of your IVA from your creditors. 

If creditors support your IVA, it will formally commence from the date of the Decision Procedure. At that point the IP will cease their role as Nominee and will be appointed as ‘Supervisor’ of the IVA. The role of the Supervisor is to ensure that creditors are dealt with in accordance with the IVA’s terms and to supervise you and ensure you comply with the terms you have proposed.

What are the advantages of a self-employed IVA?

As well as having the benefit of easing immediate creditor pressure, possible advantages of an IVA for a self-employed individual include:

• With the agreement of other creditors, the IVA can contain a formal provision that key suppliers who must be paid any arrears to ensure the continued receipt of critical supplies and therefore continued future income can be excluded from the IVA.
• Historic tax liabilities will be included within the IVA, and therefore only future taxes will need to be paid on an ongoing basis. However, it should be noted that HMRC will always insist that all outstanding tax returns are brought entirely up to date before they will consider a proposal for an IVA.
• Flexible payment terms can be agreed with your creditors. You may have a project or contract (including possibly the sale of a property or the receipt of funds from a third party) that is due to conclude in say 12 months, and the IVA may stipulate that you will make affordable monthly payments until the project or contract is concluded, thereafter creditors might be paid in full or receive a lump sum from the proceeds of the project or contract. Other similar considerations can be made for seasonal or fluctuating income, arising from the nature of your trade. 
• Third party contributions can be proposed as part, or in appropriate cases, as the whole of your Proposal.
• An IVA is often used as alternative to bankruptcy for the self-employed. In a bankruptcy it is not guaranteed you will be allowed to continue working as a sole trader, as the Trustee may not authorise you to do so, and there will be legal restrictions upon your ability to obtain credit without disclosing the bankruptcy to the provider of that credit. However, an IVA would allow you to continue to trade your self-employed business to generate a return for your creditors within the IVA.

What are the disadvantages of a self-employed IVA?

Possible challenges of an IVA for a self-employed individual include:

• You may operate in a sector where permission is required from your regulator to trade within an IVA and permission will need to be sought to propose and enter an IVA. 
• If your business bank account is overdrawn, you may not be allowed to utilise it and will need to establish a new trading account.
• Normally, individuals subject to an IVA cannot seek credit in excess of £500 without their Supervisor’s permission. Accordingly, if you require future trading credit, you will need to seek your Supervisor’s agreement to obtain credit. If it is likely you will need to regularly use a credit facility, such as a trade account, this should form part of your IVA proposal.
• Even if a creditor is excluded from your IVA, as they are an essential supplier, you may find that you are only able to obtain payment on delivery or similar terms given you are in an IVA.
• If you successfully complete your IVA, you may find credit lines/facilities remain restricted in the future, particularly with any creditor who was previously compromised within your IVA. 
• Failure to keep to the terms of your approved proposal can result in the failure of your IVA and could lead to a Bankruptcy Order being made against you, however this can often be avoided by proposing variations that are accepted by the creditors. 

Summary

If you are self-employed and considering an IVA, a good starting point is to contact a licensed IP who will seek to understand you and your business, how to assist you, and identify the positive and negative features of each available option, including an IVA, so that you are able to make an informed decision as to resolving your affairs. 

About the author

Michael Chamberlain is Director at Chamberlain & Co, a licensed insolvency practitioners and business recovery specialists committed to saving businesses and jobs wherever possible. Michael is a fellow member of ICAEW with over 30 years of experience advising lenders, corporates, distressed investors and individuals in complex financial restructuring and recovery situations across a broad range of industry sectors and jurisdictions.

See also

Insolvency notices

What is an IVA and is it right for you?

What debts are included in an individual voluntary arrangements (IVA)?

What are your options when an IVA fails?

Image: Getty Images

Publication date: 14 October 2021

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.