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Advice for sole traders facing insolvency
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What happens to sole traders when their business becomes insolvent?
As a sole trader, there is no legal distinction between yourself as an individual and your business. This means that should your business become insolvent, you, as its owner, will be expected to cover any financial shortfalls and repay any outstanding borrowing using your personal funds. In the worst cases, this may mean that a sole trader has to consider personal insolvency options such as an IVA or bankruptcy, if business debt cannot be repaid.
Understanding sole trader insolvency
When a limited company becomes insolvent, the directors receive protection from personal liability via what is known as the ‘veil of incorporation.’ The difference between this and a sole trader insolvency is that sole trader businesses are not regarded as separate legal entities.
For sole traders, the insolvency of their business is also a personal insolvency issue whereby they are wholly responsible for the debts of their business, and therefore at risk of personal bankruptcy if creditors cannot be repaid.
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What happens when a sole trader business becomes insolvent?
A slow and sometimes barely noticeable business decline can occur due to various factors, including late invoicing, slow collection of debts, and holding excessive amounts of stock.
Seeking professional insolvency help is vital as soon as you know there is a problem, because if the business becomes insolvent, your business and personal debts are one and the same. In the worst cases, this can lead to a sole trader having to consider personal insolvency options in order to deal with the situation.
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Individual Voluntary Arrangements (IVAs) for sole traders
An Individual Voluntary Arrangement is a formal and legally-binding insolvency procedure which usually lasts for around five years. If an insolvency practitioner believes the business is viable, they may recommend an IVA and begin formal negotiations with your creditors.
Once an agreement is reached, creditors are unable to take any legal action to recover the debts included within the arrangement. By the same token, you must continue to repay the agreed amounts throughout the IVA term, otherwise you risk a creditor or the supervisor of your IVA petitioning for your bankruptcy.
Benefits of an IVA
- Cash flow is improved, and apart from your mortgage, personal debts can be included in the arrangement.
- The funds to repay an IVA can come from future profits of the business, or from the sale of an asset/refinancing.
Is your company insolvent?
If your company is insolvent you have a number of legal responsibilities that you must adhere to. Taking steps to protect creditors from further losses by contacting a licensed insolvency practitioner can help ensure you adhere to these duties.
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Bankruptcy for sole traders
Enforced bankruptcy
If one of your creditors is owed £750 or more, and has unsuccessfully tried to recover the debt via a County Court Judgement and Statutory Demand, they can petition for your bankruptcy through the courts.
HMRC are known to take this route to recover arrears of tax and National Insurance from businesses they believe to be insolvent, but if it is still viable there may be ways to improve the financial situation – by refinancing, for example, or negotiating an IVA.
Declaring bankruptcy
Declaring bankruptcy is generally a measure of last resort, but in some instances it can relieve a period of extreme stress and pressure for sole traders, even though personal and business assets are lost.
- You petition for your own bankruptcy through the courts, and hand over control of your assets to an appointed supervisor.
- These are then valued, and may be sold in order to repay creditors.
- You don’t automatically lose your home - this depends on the amount of equity available, and whether it is worthwhile for the supervisor to sell it.
- The bankruptcy period generally lasts for 12 months, after which time you are released from its constraints and can begin to rebuild your credit rating.
Need to speak to someone?
If your company is struggling with unmanageable debts, squeezed cash flow, or an uncertain future, you are far from alone. We speak to company directors just like you every single day, and we are here to give you the help and advice you need.
Call our team today on 0800 644 6080
The bankruptcy petition form can be convoluted and complex to complete, so you may want to seek professional help in this respect. If you believe your sole trader business is insolvent, Real Business Rescue can confirm your financial situation and make professional recommendations based on your individual circumstances.
How Real Business Rescue can help sole traders
Our team of licensed insolvency practitioners are here to help company directors and sole traders navigate their way through their most challenging times. With a network of 100 UK offices, you're never far from expert help and advice. Contact the team today on 0800 644 6080 for immediate help and advice.
Real Business Rescue are here to help
Still unsure whether liquidation is right for your company? Don't worry, the experts at Real Business Rescue are here to help. Our licensed insolvency practitioners will take the time to understand the problems your company is facing before recommending the best course of action going forward based on your own unique circumstances.
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