Directors often take on substantial personal debt to support their business. If the company is struggling or fails they are then left unable to pay these debts. An Individual Voluntary Arrangement (IVA) could be the answer in this situation
- When would a Director use an IVA?
- Advantages of an IVA for Directors
- Disadvantages of an IVA for Directors
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When would a Director start an IVA?
If a company is struggling with debt the directors may choose to resolve the problem with a rescue solution. This might be a Company Voluntary Arrangement or a Pre Pack. These however will do nothing to resolve debts taken on by the directors personally.
Very often directors borrow money in their own name to support their company. In addition they may give personal guarantees for company debts. Given the company can no longer pay these the directors become personally liable. They not protected by the company solution.
Because of this personal liability the directors are often left in financial difficulty when a company goes wrong. It is common for them to use a personal debt solution such as an IVA to help resolve this issue.
An IVA is only available for Directors living in England, Wales and Northern Ireland. Directors based in Scotland will have to consider an alternative locally available debt solution such as a Trust Deed.
Advantages of an IVA for a Director
An IVA is a formal legal agreement with an individual’s creditors. It allows personal debt to be settled based on reduced payments made over 5-6 years.
Once an IVA is in place there are no restrictions on an individual continuing to work as a Director or taking up directorships in other companies.
The reduced payment arrangement available through an IVA is particularly useful if a director income is restricted. This will often be the case if their company is struggling.
Another advantage of an IVA for Directors is that debt owed to HMRC can be included. Very often a director will have personal tax arrears which need to be resolved as well as banking and other debts.
Disadvantages of an IVA for a Director
Once a Director starts an IVA their personal credit rating is negatively affected for 6 years. If they work in a small company this might also affect the company’s ability to get credit. Banks and other lenders will normally require a credit check to be undertaken on the director as well as the company before offering money.
If an IVA is started but subsequently the terms of the agreement are not met the director could be forced into bankruptcy. This would mean they would have to resign from their position.
If a director becomes insolvent they may be obliged to make this known to their co-directors. There is then the risk that they will be asked to step down from their role.
Starting an IVA is a matter of public record. The Director’s details are entered into the Insolvency Register. This is publicly accessible via the internet. As such the existence of the Arrangement can be confirmed very easily.