Secured creditor’s ability to enforce security - Individual Voluntary Arrangements

United Kingdom

In a case that will interest creditors with security over the assets of individuals, a provision of an Individual Voluntary Arrangement ("IVA"), seeking to prevent creditors from commencing or continuing proceedings against the debtor, has been held to be ineffective to prevent a secured creditor from enforcing its security.

In this case, the court was keen to emphasis the crucial distinction in the law of insolvency between:

(i) proving and enforcing a personal liability; and

(ii) retaining and enforcing security for that personal liability.

The court decided that whilst the wording of the clause in the IVA (as set out below) would operate to prevent the bringing of any proceedings, execution or process to enforce the personal liability of the debtor to make payment of a sum due to a creditor, it would not preclude a secured creditor from enforcing its security. It was irrelevant for these purposes whether or not such enforcement by the secured creditor required the involvement of the court (as it did in this case).

The relevant clause of the IVA reads as follows:

“……….the creditors shall not be entitled to commence or continue any proceedings/execution or other legal process in respect of the Debts save for such dividends as shall be payable by the Supervisor under the terms of the Voluntary Arrangement”.

The decision that the clause had no effect on the right of enforcement of a creditor’s security was consistent with the fact that the IVA expressly incorporated Rule 6.115(1), which permits a secured creditor to alter the value stated in his proof of debt upon the basis of its security.

It should be noted that the case concerned a creditor who had voted in favour of the IVA. If the creditor had not voted in favour, the IVA would be void, in accordance with section 258(4) of the Insolvency Act 1986. Section 258(4) prohibits the approval of any proposal or modification to the IVA affecting the right of a secured creditor to enforce his security, unless the creditor concerned concurs.

Secured creditors will welcome the court’s decision to uphold a creditor’s right to enforce its security, despite the inclusion of such clauses in IVAs. However, creditors should be alert to the risk that they may not be able to enforce a personal liability. In particular, they should ensure that any proof of debt submitted gives full credit for the value of any security held for the relevant obligations and that any IVA provisions precluding legal proceedings are not altered by consent to prevent the enforcement of any security.

Law: Rey and anor v FNCB Ltd [2006] EWHC 1386 (Ch)