Summary: Miss B and Mr C complained that the Council refused to refund payments recovered from a debt which had been included in an Individual Voluntary Arrangement. We find fault in the Council’s actions: it did not appeal against the outcome of the IVA but neither did it abide by the terms of the IVA and continued to recover the debt. The Council has agreed to refund the payments to the Insolvency Practitioner.

The complaint

1. Miss B and Mr C complain that Wirral Metropolitan Borough Council (the Council) refused to refund payments it received via an Attachment of Earnings Order for debts which it later agreed should be included in the Individual Voluntary Arrangement (IVA).

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The Ombudsman’s role and powers

2. We investigate complaints about ‘maladministration’ and ‘service failure’. In this statement, I have used the word fault to refer to these. We must also consider whether any fault has had an adverse impact on the person making the complaint. I refer to this as ‘injustice’. If there has been fault which has caused an injustice, we may suggest a remedy. (Local Government Act 1974, sections 26(1) and 26A(1), as amended)
3. If we are satisfied with a council’s actions or proposed actions, we can complete our investigation and issue a decision statement. (Local Government Act 1974, section 30(1B) and 34H(i), as amended)

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How I considered this complaint

4. I have considered the complaint and the documents provided by the complainant, made enquiries of the Council and considered the comments and documents the Council provided. I have written to Miss B and Mr C’s representative and the Council with my draft decision and considered their comments.

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What I found

Individual Voluntary Arrangements

5. An individual voluntary arrangement (IVA) is a formal and legally binding agreement between a person and their creditors to pay back debts over a period of time (normally three to five years). It is set up by a qualified person called an Insolvency Practitioner, who comes to an agreement with creditors to a repayment plan, usually to pay a proportion of the debts based on what the person can afford. At the end of the period of the IVA any remaining debts are written off.
6. The Insolvency Practitioner will call a creditors' meeting at which the creditors vote on whether or not to accept the proposed repayment plan. If enough creditors vote for the proposal, the proposal is accepted and this is reported to the court.
7. The IVA will then be binding on all the creditors, even those who voted against the proposal.
8. The Insolvency Practitioner will then collect money from the debtors in accordance with the agreement and distribute it on a proportional basis between the creditors.
9. Creditors, debtors and the IP have a right to appeal to the County Court against the IVA if something was wrong with the procedure or a creditor was not treated fairly.

IVA protocol

10. This is a voluntary code of practice, which all insolvency practitioners and most creditors have signed up to. The protocol makes sure the processes involved in setting up and managing an IVA are clear and fair. It also sets out the terms and conditions all parties must follow.
11. The protocol states the following in terms of the information creditors need to provide as proof of the debt:

Creditors should make reasonable endeavours to provide a proof of debt (in the form required by the IVA provider) and proxy form within 14 days of receipt of an IVA proposal and if possible at least 7 days before the date of the meeting called to approve the proposal.

The Insolvency Services Technical manual

12. This document provides more detail on what should be provided by a creditor as proof of the debt. It includes:
• the creditor’s name and address and where relevant the company registration number;
• the total amount of the claim, including VAT, as at the date of the insolvency order;
• whether the claim includes any outstanding uncapitalised interest;
• particulars of how and when the debt was incurred.
13. There is no longer a requirement for a specific form to be completed in order for a proof of debt to be valid in most cases, although statutory forms are available and any proof submitted should be in a substantially similar.

The Insolvency (England and Wales) Rules 2016

14. This legislation says that a vote cast by a creditor must be accompanied by a proof in respect of the creditor’s claim.

The Housing Benefit Overpayments Guide 2015

15. This government guidance says that debts included in an IVA can continue to be recovered from ongoing benefits during the period of insolvency. But it warns that whilst there is currently no legal barrier to recovery by deduction during an IVA it may be open to challenge.
16. It also says that Local Authorities should be careful not to over-recover an overpayment if they are receiving payments through the terms of the insolvency, alongside recovery from ongoing entitlement.
17. In the question and answers section it says that if the local authority is not receiving any payments through the IVA agreement it can continue to take payments via an attachment of earnings.

What happened

18. Miss B and Mr C owed a housing benefit overpayment to the Council, which it was recovering by way of an attachment of earnings direct from Mr C’s salary.
19. In October 2018 their Insolvency Practitioner (IP) wrote to all their creditors, including the Council, proposing an IVA and a creditors meeting on 8 November 2018. The information included a proof of debt form for the creditors to complete and return.
20. The proposal was over 60 months and required payments by Miss B and Mr C of £196 per month for the first five months then £100 for the remaining 55. It said that the first distribution would be made once the IP’s initial fee had been paid and there were sufficient funds to distribute. It anticipated the first distribution would be made after approximately 12 months. The IP initial fee was £2000.
21. The Council returned a proxy form (giving its vote to reject the proposal without needing to attend the meeting) on 25 October 2018. The proxy form had been signed by the Council officer but the section asking for the position with the creditor had not been completed.
22. The Council sent this with a covering email, containing the HB reference and amount outstanding and the officer’s job title. The Council rejected the proposal and requested the overpayment be removed from the IVA as it was a public debt.
23. The IVA was confirmed on 8 November 2018 and all creditors were notified by 21 November 2018.
24. The Council contacted the IP on 21 November 2018 noting that the Council’s vote had been declared invalid. The Council said it had sent its vote in on time and so it would be continuing with its own recovery of the overpayment.
25. The IP replied explaining that the vote had been rejected because the proxy form had not been completed correctly and the proof of debt form was not completed at all. It requested the Council cease recovery of the overpayment.
26. The Council said its vote was valid as all the required information had been included in the covering email and so it would continue with recovery until it received a county court judgement.
27. The IP replied stating that although the Council disagreed with the treatment of its vote, all creditors were bound by the outcome and had to adhere to the agreement in accordance with the Insolvency Act. It said the Council needed to refund any money taken for the debt after 8 November 2018.
28. The Council maintained its view that its vote had been valid and it would continue with recovery. It offered to come to an arrangement with Miss B if an income and expenditure sheet was provided. The IP asked for the legal basis on which the Council believed it could continue recovery. The Council said it was seeking advice from the Insolvency Service on the validity of its vote/proxy form.
29. In January 2019 the IP noted the Council was still recovering the debt. It pointed out the Council had 28 days from 21 November 2018 to formally object to court about the outcome of the creditor’s meeting.
30. The Council replied on 4 February 2019 saying that the Insolvency Service confirmed that the submission of information by email was at the IP’s discretion. It said that the IP had not made clear it would not accept the information by email. It would now agree to be included in the IVA and cease the attachment of earnings but it would not refund the payments already collected since the IVA was agreed.
31. The IP responded saying that the Council could not keep the payments as that would prejudice the principle of an IVA where all creditors were treated in the same way: they each get the same proportion of their debts repaid. The Council had recovered three months totalling £468.97 which was affecting the ability of Miss B and Mr C to keep to the terms of the IVA.
32. The Council refused to refund the money already collected. It said the IP had not informed the Council, that it would not accept information by email. The IP said this was not the issue; but rather that it had not enclosed proof of the debt with the vote.
33. The IP went through the complaints process, but the Council maintained its view that the IP had not explained information was not acceptable by email and that it had provided proof of the debt.
34. The IP complained to the Ombudsman. They said no payments had been made under the IVA as there were insufficient funds to do so, exacerbated by the Council continuing to recover the overpayment.

Analysis

35. The Council returned the proxy form without completing it fully and without the proof of debt form. It said its covering email contained the required information and so its vote should have been treated as valid. The IP disagrees.
36. I note that the IVA protocol requires creditors to provide a proof of debt in the form required by the IVA provider. I also note the Insolvency Service Technical Manual requires a creditor to provide details of how and when the debt was incurred. The Council did not comply with these requirements.
37. It is not for the Ombudsman to say whether or not the vote was valid as the Council had a right to appeal to court against the outcome and ask it to decide. I consider it should have done this if it disputed the outcome. As it did not appeal it should have complied with the terms of the agreement. The failure to do so was fault.
38. It only did this on 4 February 2019 by which time it had recovered three further payments from Mr C’s wages. The Council argues it was entitled to keep these payments as the IP had not made clear it would not accept information by email. I do not consider the Council has given a valid reason for refusing to refund the payments as the IP has never said it would not accept information by email; it rather said the Council had not provided proof of the debt in accordance with the law. Furthermore, it should have appealed to test out its view, rather than simply ignore the terms of the IVA and continue recovery. Again the failure to do so was fault.
39. The Council has argued that it is entitled to continue with recovery in accordance with the government guidance which says it can continue with recovery where it is not receiving payments from the IVA. It is not for the Ombudsman to reconcile the contradiction here between the guidance and the legislation requiring creditors under an IVA to be treated in the same way. That is a matter for the courts. However, given that the IVA said the first payment was not anticipated for 12 months, it seems premature to continue recovery during the first three months.
40. The failure to refund the payment has affected the operation of the IVA, as the fund (up to 19 December 2019) has insufficient funds to pay the creditors.

Agreed action

41. The Council has agreed to refund to the IP, the three payments collected after the IVA was agreed.

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Final decision

42. I consider this is a fair and reasonable way of resolving the complaint and I have completed my investigation on this basis.

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Investigator's decision on behalf of the Ombudsman