The decision in Green -v- Wright was handed down in the Court of Appeal on 1 March 2017 and seeks to address the following issues:

  • Whether a trust created in an individual voluntary agreement (IVA) terminates on completion.
  • What is the definition of a ‘creditor’ for the purposes of an IVA?
  • What is the effect of a certificate of completion?

Does a trust terminate?

The issue of trusts in IVAs has been the subject of litigation before, but this case addresses a novel point. What happens to the trust when the debtor has complied with all of their obligations and the IVA has completed? The Court of Appeal has now ruled that the trust continues. The judgment is clear that an expressly created trust can only be terminated by specific terms. Those terms must provide for what will happen to the trust assets.

What exactly is a ‘creditor’?

The arguments previously advanced in the lower courts in this case did consider who the beneficiaries of a trust were if that trust continued. Once an IVA is complete, the debtor is released from their debts comprised within it. The conclusion is therefore that, as there are no debts, there are no ‘creditors’, and therefore no beneficiaries under that trust. In such a circumstance, the funds revert to the debtor. The Court of Appeal judgment in Green -v- Wright takes a different approach and attempts to align the IVA procedure with that of bankruptcy. Once a bankrupt has their discharge, it doesn’t stop any trustee from realising assets and paying dividends. The Court of Appeal has found that there should be a comparable regime in an IVA. Just because the debtor is released doesn’t mean that the debts cease to exist. In dealing with the fundamental concepts of what is a ‘creditor’ and what is a ‘debt’, the Court of Appeal has decided that both of these survive completion, and a dividend from the continuing trust can be paid. The suggestion is that one can be a ‘creditor’ without there being any ‘debt’ due from the individual.

What is the effect of a certificate of completion?

It is reasonable to assume that, for a debtor, completion means exactly what it says: the IVA contract is ended and the creditors and supervisor have no further involvement in their affairs. It is also fair to say that that same individual would understand ‘released from all liabilities’ to mean exactly that. This ruling confirms that ‘complete’ may mean no such thing. The trust and debts continue. The obligations of the individual may have been fulfilled but payment protection insurance (PPI) claims (or other realisations comprised in the trust) which pay out, even years later, will go to the supervisor.

The decision is an interesting one and will certainly be of concern to insolvency practitioners, debtors and lenders alike.

  • Undoubtedly, debtors will be concerned that ‘complete’ does not mean what they think it does.
  • There will inevitably be genuine concerns by both insolvency practitioners and debtors about what advice/information was provided regarding the creation of a trust and its implications.
  • Insolvency practitioners will be aware that they may now be faced with on-going obligations on their part under the trust, which they did not envisage, request or even want.
  • Lenders will also have to be vigilant in deciding where any post-IVA completion funds, including PPI payments or other compensation, should go. They will also need to consider not only whether an individual is in an IVA, but whether they have ever been in one.

However, this decision does bring some long-needed clarity on this issue for all concerned. Whether that clarity brings additional headaches will have to be seen.

An IVA is an individual contract with creditors. It does not follow the bankruptcy regime. Nor is it obliged to parallel or mimic it over and above what it set down in statute. For many, the attraction of an IVA is that the contract runs for a set period of time; there is then, in effect, a clean break on termination. This does not appear to be quite as straightforward as it may have first seemed.

Insolvency practitioners and their regulatory bodies have been live to the issue of ongoing trusts since Green -v- Wright brought this into the spotlight. Many recent arrangements, and certainly those going forward, could contain the specific provisions needed to terminate any trust on completion. The main area of concern is going to be IVAs like those of Mr Wright, where this issue was not foreseen or catered for within the contract created. Those arrangements have now completed and it appears that those trusts live on.

This article first appeared on the Practical Law Dispute Resolution Blog on 6 March 2017.