Advice for sole traders facing insolvency

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.

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.

“Spoke with Chris who put me at ease straight away. He was very knowledgeable and listened intently to all my worries and concerns. Will definitely be using Real Business Rescue and advise anyone with business issues to give them a call.”

Diana

 

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Chris Bristow
Business Debt Expert

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

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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.

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.