In an important Court of Appeal (CoA) decision handed down on 1 March 2017, the CoA has clarified the position for banks, lenders and insolvency practitioners regarding realisation of assets after certificates of completion have been issued in individual voluntary arrangements (IVAs).
The decision in this case has been a long time coming having first been heard in Burnley in October 2014 and then on appeal in the High Court in Manchester in February 2015. There has been a significant period of uncertainty within the insolvency industry as to how post-closure realisations are to be dealt with in IVAs.
The debtor entered into an IVA with his creditors which concluded in January 2013. The debtor complied with all obligations under the IVA and a certificate of completion was issued confirming that he was released from all debts subject to the arrangement. Some months later PPI claims made by/on behalf of the debtor were upheld and funds were paid out in this respect. Those funds were paid to the former supervisor of the IVA who, in the absence of agreement with the debtor, issued an application to court for guidance on who was the correct recipient of such funds.
There were a number of agreed principles within the case:
- The arrangement was an all assets IVA in that it comprised all assets which would have formed part of a bankruptcy estate. The only assets not included were those which were specifically excluded.
- The IVA did create a trust of those assets comprised within the arrangement.
- The PPI claims in question were an asset of the arrangement in that they were in existence at the date the IVA was entered into. The right to claim existed even if the debtor was not aware of it at the time.
The debtor’s position was that he had complied with all obligations under the IVA, he had received his certificate of discharge, he had no further liability to creditors and those creditors had received a final dividend within the IVA. He maintained that any trust which had been created had terminated on completion. The supervisor took the view that the certificate of completion did not terminate the trust nor the debtor’s liability to the creditors within the IVA but that such trust continued post-completion and that creditor rights to prove in the IVA extended to a right to be paid a dividend from any future assets comprised within that trust.
The district judge in Burnley and His Honour Judge Hodge in Manchester both found in favour of the debtor. The funds were to be paid to him and not to the supervisor. The Court of Appeal has taken a very different view and ordered the correct recipient for such funds is the supervisor.
The CoA has found that an IVA trust will continue beyond the issuing of a certificate of completion if the IVA has no express terms to bring that trust to an end. Where a trust is formed, which is not a necessity for any IVA, such trust must formally terminate under the terms of the IVA and it must also specify what will happen to trust assets.
The CoA decision has considered the purpose and effect of a completion certificate and has concluded that whilst this releases the individual from any liability to IVA creditors, it does not extinguish those debts. Those IVA creditors still have a right to claim on any assets which are comprised within a trust created by the IVA. This goes to be very heart of what it is to be a 'creditor' within an IVA. The CoA was clearly not persuaded by the argument that the debts had been extinguished and there were no creditors - even if the trust did survive post completion the only beneficiary of such trust was the debtor himself.
The decision also draws parallels with the bankruptcy regime in terms of a bankrupt receiving automatic discharge, but the bankruptcy debts still falling to be paid from the estate.
The implications of this CoA decision are far reaching and touch not just the insolvency industry but also lenders and debtors. Insolvency practitioners will be concerned that they may have been refused post-closure realisations and that these have been paid to the debtor at the expense of creditors. Insolvency practitioners will also have to consider the practical implications of this case in terms of remaining as trustee of any trust created by an IVA. This has a real practical implication of retaining files, insurance, on-going duties etc. for the insolvency practitioner.
Lenders will have to take note of the decision to ensure any debt is discharged to the correct party. If payments are made to individuals, which should have been made to a supervisor, which could easily have completed years before, then those lenders will have to ensure their records are accurate with regards to who can give valid receipt for those funds or they run the risk of potential claims if a valid receipt has not been provided.
This will also have a huge impact on consumers. Many people enter into an IVA in the belief that it is a contract for a fixed period and if they comply with all obligations under it, there is in effect a clean break on conclusion. If debtors comply with the terms set the arrangement will complete and that will mean ‘completion’ in every sense. This decision means that this closure does not happen as any trust created by an IVA can live on and PPI claims, and any other post-closure realisations which fill the relevant criteria, which are not realised until years later, can still be claimed by a former supervisor and the proceeds distributed to creditors who have already accepted a final dividend. This degree of uncertainty is unsatisfactory. It is also worth noting that the financial ombudsman regularly revisits the issue of PPI mis-selling claims and provides revised guidance to banks and lenders with regards to the criteria for such complaints to be upheld. It is certainly the case that PPI claims may be initially refused but which are then revisited and the complaint upheld – resulting in payments months or years later giving rise to the issues raised above.
It is difficult to say what the reaction(s) to this decision will be, it will certainly depend on whether you are an IP, bank or individual debtor but it does, thankfully, provide some clarity on this issue. Whilst it may leave insolvency practitioners with on-going obligations which they may not have envisaged or wanted, it may leave consumers still wondering what ‘complete’ actually means for them.