Existing bankruptcy law is based on UK legislation dating back to the turn of the last century. One of the changes enacted in April 1998 was the introduction of the Individual Voluntary Arrangement (“IVA”) procedure.
The concept of the IVA was new to Hong Kong at the time. It is an alternative to bankruptcy for some of those people who face financial difficulties, and for whom in the past the only option was bankruptcy.
Based on legislation first enacted in the UK in 1986, the IVA offers the possibility of reaching a compromise with creditors. This is turn should provide a better return to creditors than they would be likely to achieve in bankruptcy. At the same time, it enables the individual to avoid the stigma and disabilities attached to being an undischarged bankrupt.
The procedure is supervised by the Court but will be dealt with by an accountant or solicitor experienced in dealing with insolvency matters. An IVA can be proposed to creditors to prevent bankruptcy proceedings or even after a Bankruptcy Order has been made.
It takes the form of a proposal to creditors for settlement of an individual’s liabilities. A meeting of creditors is convened to consider the proposals. Creditors can vote by proxy or attend the meeting in person. They can approve the proposal, approve it with modifications or reject the proposal.
Unlike in many other forms of insolvency, the wording of the legislation is designed to ensure that creditors receive sufficient information at the outset to enable them to make an informed decision as to whether or not they wish to accept the proposal.
A majority of 75% in value of creditors present at the meeting is required to approve the proposal. Once accepted, it is binding on all creditors who were given notice of the meeting. It is extremely important to note that any creditor who was not notified of the meeting is not bound by its outcome. If they are not bound, they may still petition for bankruptcy on any outstanding liability, provided it is more than the minimum bankruptcy debt.
Experience of this procedure in the UK during the last 25 years or so has been positive. Evidence points to the fact that it has led to an increase in dividends to the unsecured creditors of insolvent individuals. It is designed to be relatively straightforward, thus eliminating much of the bureaucracy which accompanies bankruptcy proceedings and which also contributes to the slow payment of dividends at a reduced rate.
If an IVA is to be a practical proposition for creditors, it should really present them with a better alternative, i.e a greater dividend, and sooner than would be payable in bankruptcy proceedings. It is therefore a procedure which is most appropriate for individuals who have assets, or who have the possibility of generating funds for the benefit of their creditors from their future earnings.
In the past, bankruptcy was often the only option available to an individual in financial difficulties. The IVA now offers new hope to many of those who are in difficulties, but who have the future earning potential or the assets to help them avoid the strictures of bankruptcy and which can help provide a better return to their creditors.