INS10441 - VA failure

Funding legal action

Introduction

When an individual debtor fails to comply with the terms of the VA, or the VA fails within the meaning of Section 276 IA1986, the supervisor is under an obligation to

• Advise creditors. Usually the supervisor issues a certificate of non-compliance.
• Take bankruptcy action under Section 264(1)(c) IA1986 based upon the failure of the VA.

The supervisor is required by VAS modification or R3 IVA condition 68 to set aside funds to do this, in priority to all other expenses and costs of the arrangement. But if there are insufficient or no funds, they may ask creditors, particularly VAS, to provide funding.

For CVAs

• Check the terms of the approved proposal and modifications.

If there is no duty upon the supervisor to bankrupt or wind-up they cannot take such action and there may be nothing that can be done to formally terminate the arrangement.

All you can do in that case is to independently pursue any post-VA debts.

In all VAs

• Check the obligation to petition imposed on the supervisor.
• Is it subject to, or regardless of, available funds?
• Check whether funds should have been set aside for petition costs?

If funds should have been set aside ‘in priority to all costs of the arrangement’ no nominee or supervisor fees or any other expense should be paid until petition funds are held.

• If funds should have been set aside ‘in priority to supervisor’s fees only’ this does allow nominee’s fees and costs to be paid. See Rule 5.33 (formerly 5.28).
• When a supervisor is obliged to set aside petition funds, but has wrongly used monies received to meet other costs, ask the supervisor to reimburse the VA fund and then petition.
• When a supervisor is obliged to petition, but was not required to set aside petition costs, or funds retained are insufficient to meet court and legal costs, VAS may fund the shortfall. Ask for an estimate of reasonable costs and explain the funding policy:

Funding Policy

VAS does not fund any shortfall relating to supervisor’s costs, as sufficient VA funds should have been retained to provide for the costs of obtaining a bankruptcy order, in priority to all other costs and expenses of the arrangement. These are defined in Rule 5.33. This is a standard requirement under the ‘R3 terms applicable to IVAs’ and a standard modification applied by VAS to all arrangements that it supports and which do not propose such a term.

Where no funds have been paid into an arrangement in which VAS is a major creditor, VAS may underwrite court and related legal costs provided these do not exceed the approximate legal costs of undertaking such action ourselves, and VAS is likely to see a return on its money. But this does not extend to funding supervisor’s costs, as such arrangements were never viable and should not have been recommended to creditors in the first place.

In discussions with the R3 Technical Committee on this issue, some members have expressed the view that supervisors should meet the entire costs of insolvency action when no funds have been paid into a VA. That should be so when there is a history of multiple failures by the same firm of insolvency practitioners, however there is no legal basis to demand this.

Advance payment of funding

Given the circumstances in which funding is made and the small sums involved, there is little case for advancing legal costs. Payment should be on results. VAS will agree, before proceedings, the extent to which it is prepared to guarantee funding. VAS will not pay any excess over the guaranteed amount.

Legal Services Budget

DMB has a legal services budget specifically for funding bankruptcy or winding up action when VAs have failed. The C2 Managers maintain an Excel spreadsheet record to account for these.

The funding of supervisor’s legal action in VA cases must

• Always be referred to as ‘funding of legal action’
• Not be referred to as, or confused with, the ‘Guarantees of Costs’ in insolvency cases dealt with separately at EIS Worthing (see INS9751).

Funding of legal action

• Before agreeing to any funding, write to the supervisor to ask what balance of funds is held, for an estimate of reasonable costs and explain the VAS funding policy.

When you receive a detailed estimate, eliminate any IP costs and consider offering to guarantee funding any reasonable costs shortfall. Reasonable costs, excluding IP fees, will not exceed £1200 including VAT.