The Effect Of Fraud On An IVA Debt

Image: Amanda Marie/gdtography/Unsplash
Image: Amanda Marie/gdtography/Unsplash

Q: A debt included in an IVA has turned out to be a sum which the Debtor obtained by fraudulent means. What can I do?


The General Rule:

It is common knowledge that, provided there is no breach and failure of an IVA, in ordinary circumstances any balance remaining at the conclusion of the IVA must be written off by creditors.

Is It Really Fraud?

The first thing to keep in mind is that fraud is a serious allegation and as such, must be proven rather than merely asserted. That said, for the purpose of insolvency related matters fraud need only be proven to the civil standard. There need not be a criminal conviction. Any party seeking to proceed on the basis of fraud must sensibly evaluate their evidence and should seek legal advice. Beyond that, there is no set legal definition of fraud save that the common element is a dishonest intention. The Courts have been reluctant to define ‘fraud’ as to do so would likely see schemes emerge just outside of the definition which would not be desirable.

Ok, It Is Fraudulent, Now What?

The rules for bankruptcy are clear; s.281(3) of the Insolvency Act 1986 provides that fraudulently accrued debt survives discharge. It would be strange therefore that an IVA would offer a way out for fraudulent debtors. My view, put simply, is that public policy dictates that it does not. Fraudulently accrued debt survives the conclusion of an IVA and any balance can be pursued thereafter. The Court of Appeal seems to support a policy based approach following its decision in Child Maintenance and Enforcement Commission v Beesley [2010] EWCA Civ 1344 and it would be hard to imagine a case concerning fraud would be decided differently.

The IVA Isn’t In Place. Can I Avoid The Debt Being Included?

There is no absolute bar to the inclusion of the debt, but the first step would be to approach the nominee and ask that they exclude it on the basis of fraud. If they decline, the next step would be to see whether 75% of creditors vote in favour of the IVA. There is of course the chance that your own debt could exceed 25% and enable you to vote the IVA down yourself. If the IVA is approved, the final recourse would be to apply to the Court under s.262 of the Insolvency Act 1986 to challenge the creditors’ decision. The basis for the application is unfair prejudice to a creditor and where the debt has been accrued by fraudulent means it is a straightforward argument to run that a curtailment on enforcement during the IVA would amount to undue prejudice. These applications will of course turn on the facts of each case and a creditor may be left to wait until the conclusion of the IVA to resume its efforts, though would expect to receive payment during the IVA as an unsecured creditor.

Alex Worthington

Greenhalgh Kerr
Olympic House, Beecham Court,
Smithy Brook Rd,
Wigan WN3 6PR

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+44 (0)333 200 5200

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