When a man was worried that his creditors would not approve his proposals for an Individual Voluntary Arrangement (IVA), he took innovative steps to ensure that when the meeting of creditors was held a majority of them voted for it.
An IVA is a plan submitted to creditors that allows a person to pay off his or her debts over time, normally five years. The advantage of an IVA for the debtor is that they are not made bankrupt. The IVA proposals must be voted on and accepted by the creditors to be effective.
The solution adopted was for a friend of the man to ‘buy’ a debt due to a third party, so the friend became the creditor. He then added his vote to the ‘yes’ votes for the IVA. The arrangement was not disclosed to the other creditors. For the debtor, it achieved his desired end of avoiding bankruptcy and the investigation of his conduct that would have gone with it.
When the arrangement was discovered, the other creditors were unhappy and took the matter to court. The Court of Appeal agreed that the man’s friend had the right to acquire the debt due and to vote on the proposal. However, since the assignment of the debt was not a genuine commercial arrangement, had not been carried out on genuinely commercial terms and the pair had not been open and transparent about it, the Court ruled that the circumstances justified the revocation of the IVA.