There is a common misconception that Insolvency Practitioners (IPs) should only be contacted by a business or individual facing financial difficulty.

What happens if you are a creditor in an Insolvency process who believes the outcome should be challenged?

Background

The Funder (our client) was a major creditor in an Individual Voluntary Arrangement (IVA), The IVA provided for the sale of various properties with little or no equity, and contributions if the debtor managed to earn any income.

The IVA was approved by two large creditors. The Funder was surprised, as the estimated dividend was only just over 1p in the £, and the creditors would be unable to pursue the debtor for the balance.

Since the IVA was approved , there would be no investigation into the affairs of the debtor, as would take place in a Bankruptcy. This was an issue for the Funder, who had concerns over the accuracy of information provided by the Debtor, and struggled to understand why entirely unconnected creditors, who had lost a significant sum of money, would be happy to agree to these amounts simply being written off, and for the debtor not to be held accountable in any way.

The fundamental principle of an IVA is that creditors will receive a better return than in Bankruptcy, which was questionable in this particular case.

Fast forward a year and all properties had been sold with only a return to the first charge holders, who all suffered shortfalls, and no contributions had been made into the IVA by the debtor. Therefore, there were no realisations at all within the IVA.

The Supervisor of the IVA canvassed the opinion of creditors as to whether it should be successfully concluded. This was voted through by the same large creditors who had approved the IVA and, who between them would be writing off over £1 million without any recourse or investigation into the Debtor’s actions. The more cynical amongst us may find this a little odd, and as our IP stated to the Funder, becoming cynical happens when you watch too much Scooby Doo growing up.

The essence of the instruction for Shaw Gibbs was to analyse the IVA proposal, reports to creditors and voting processes, and generally to sense check the whole scenario. A report was prepared on this basis. In-depth conversations followed between the Funder and the IP, who was then requested to liaise directly with the Supervisor to ask more probing questions. A second and final report was submitted with Shaw Gibbs’ views, opinions and recommendations of actions to be taken and legal advice to be sought.

Certain documents reviewed by our IP have raised questions as to whether the relationship between the Debtor and various creditors should have been declared as associated creditors. If these creditors had been treated as associates, there would have been two rounds of voting to approve the IVA with the connected parties excluded from the second round of voting. This would have resulted in the IVA being rejected by the remaining creditors.

How did Shaw Gibbs add value?

The Funder, on first contact with our IP, stated that he needed the eye of someone with in-depth IVA knowledge to point out irregularities and act as a go-between with the Supervisor so that questions could be asked in the manner required to elicit meaningful responses.

The reports prepared by our IP provided a detailed analysis of the possible areas of concern which are now being used by the Funder to seek legal advice. It is likely the IP will be involved in liaison with the chosen solicitors and possibly act as a witness in any bankruptcy proceedings.

Although this engagement can be generalised as creditor representation, it is far from being a conventional instruction, and illustrates how diversely the skill sets of our IP’s skill can be used.

See our previous case study

What happens if you run a business with good financial controls, but it is evident that some parts of your business are loss making and this will impact on solvency?