IVAs and Mental Capacity – Test Case Ruling

Can individual voluntary arrangements (IVAs) be valid if debtors who enter into them lack the mental capacity to make rational decisions? In an important test case that has clarified the law, the High Court answered that question in the affirmative.

The case concerned a woman who, with her husband and others, was said to owe £224,000 in unpaid tax. She entered into an IVA but, after she failed to keep to its terms, a bankruptcy order was obtained against her by HM Revenue and Customs. Some years before she signed the IVA, she suffered a brain haemorrhage that was alleged to have seriously affected her decision-making ability.

Her challenge to the validity of the IVA was rejected by a judge, who found that there was insufficient medical evidence to show that she lacked capacity at the relevant time. In rejecting her challenge to that ruling, the High Court declined to consider fresh evidence and found that the judge’s decision could not be faulted.

Turning to the issue of the broader application of the IVA, the Court found that the IVA was binding on her even if she lacked the mental capacity to understand its key features and effects. It noted that IVAs are closely analogous to contracts and give rise to rights that have the characteristics of contractual rights. It is established law that contracts entered into by persons lacking mental capacity are valid and binding unless the other contracting parties are aware of their incapacity.