Sole trader insolvency

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According to the Office for National Statistics, sole proprietors represented 23.8% of all UK enterprise in 2010. [1] Of that number, more than half a million sole traders were operating via the PAYE or VAT system alone. [2] Sole traders are a distinct legal entity, operating as one type of UK business structure. [3] In the event of financial problems affecting the business, they are subject to different rules to those that govern companies. [4]

Contents

Sole trader insolvency occurs when the business cannot meet financial obligations. It may be that bills cannot be paid on time, leading to debts which eventually attract legal action by creditors. Insolvency does not automatically equate to bankruptcy; [4] definitions of insolvency are provided within the Insolvency Act 1986. [5] Cash flow insolvency occurs when a business cannot meet its credit obligations as they fall due. Balance sheet insolvency occurs when the businesses’ liabilities exceed its assets. [5] According to Business Link there are a number of factors that can lead to sole trader insolvency. These can include late invoicing for goods or services, accepting orders that exceed its financial capacity to deliver, failure to recover debts, excess inventory and unsuitable credit arrangements and often personal drawings taken in excess of profit. [6]

UK Insolvency statistics

During 2010, the recorded number of individual insolvencies in England and Wales was 135,089 according to the UK Government’s Insolvency Service (including provisional figures from the final quarter). The figures had fallen by 13.6% during the final quarter compared to the same quarter during 2009. 12,049 individuals declared formal bankruptcy, a drop of almost a third (29.2%) on the previous year. 12,058 entered formal Individual Voluntary Arrangements (IVAs), representing an annual drop of 5.4%. A further 6,172 entered a formal Debt Relief Order (DRO), an increase of 15.4% on the previous year’s figures. The levels of self-employed bankruptcies had fallen slightly by the third quarter of 2010 to make up 11.9% of the total within England and Wales. [7] This represented an improvement on the number of bankrupt sole traders during the previous year and up to June 2010.

UK Insolvency Law and sole traders

Insolvency Act 1986

This legislation provides the legal framework for two key formal insolvency solutions relevant to sole traders: namely bankruptcy and Individual Voluntary Arrangements. It also makes provision for company insolvency [8]

Bankruptcy laws vary somewhat between Scotland, Northern Ireland, Wales and England. In England, Wales & Northern Ireland, the applicable law is the Insolvency Act 1986.[ example needed ] Bankruptcy requires the surrender of all valuable assets to the Official Receiver, including any property interests. It is extremely unlikely the business activities would be permitted to continue. Additionally, there are quite a number of other legal restrictions upon the bankrupt individual. Individuals are therefore cautioned by the Insolvency Service to explore whether alternatives exist. [9]

Individual Voluntary Arrangements (IVAs) operate in England, Wales & Northern Ireland as a contractual agreement between the insolvent individual and the creditors they owe money to. IVAs are facilitated by an Insolvency Practitioner and are an agreement that the individual will repay agreed instalments over a fixed period of time. [10] In Scotland, the Protected Trust Deed serves a similar purpose. [11]

Insolvency Act 2000

This act was introduced in two stages: 2 April 2001 and 1 January 2003. It made provision for a new moratorium method to address financial difficulties faced by small companies. Relevant to sole traders, it also somewhat amended Individual Voluntary Arrangements procedures. [12]

Key amendments for sole traders

The Insolvency Act 2000 somewhat modified procedures for Individual Voluntary Arrangements. Previously, under the Insolvency Act 1986 an individual had to initially apply to the court for an interim order. This order would then be followed by the next legal procedures towards arranging the IVA itself. The Insolvency Act 2000 removed the need to apply for an interim order, except where a petition for the individual’s bankruptcy already applied. [12]

There were also changes aiming to fulfil the overall purpose of the IVA, namely coming to an acceptable agreement between the individual and those they owed money to. Two cases were heard in the High Court of circumstances where this interim order had been granted but landlords were nonetheless able to lawfully gain the right of peaceable re-entry / seizing of goods in respect of rent arrears. The Insolvency Act 2000 accordingly introduced amendments aiming to prevent this type of intervention and accordingly promote the negotiation phase instead. [12]

Insolvency options for sole traders

Voluntary arrangements

It may be possible to continue to trade by negotiating with creditors to gain more flexible payment arrangements. [13] This type of informal arrangement may be facilitated by a business rescue professional but will not be legally binding on creditors. By contrast, Individual Voluntary Arrangements are legally binding on all creditors providing those representing 75% of the total debt owed agree to the IVA proposal. [14]

Bankruptcy

An individual may voluntarily petition the local Court with bankruptcy jurisdiction for a Bankruptcy Order (BO)to be made, usually by a District Judge. The petition will require a supporting statement of affairs. On the making of the BO, the Court notifies the Official Receiver (OR) and may in certain cases also appoint an Insolvency Practitioner. The OR has a dual function, to investigate the causes of financial failure and report any misconduct and to act as Trustee if no trustee is appointed by the Court. [15] A creditor may petition for an individual’s bankruptcy using a prescribed series of legal steps and must be owed a minimum fixed amount of debt of at least £750. [16] A County Court Judgement must be granted in their favour for that debt.[ citation needed ] The creditor must then issue a statutory demand for repayment. Should the demand fail to be settled within 21 days, the creditor has the option to proceed with a bankruptcy petition to the court. Following the issue of a bankruptcy order from either route, the individual cedes control of their assets to an Insolvency Practitioner, to be sold to raise funds towards repaying creditors. [17]

See also

Related Research Articles

Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

Liquidation Winding-up of a company

Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.

A creditor or lender is a party that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property and service. The second party is frequently called a debtor or borrower. The first party is called the creditor, which is the lender of property, service, or money.

A debtor or debitor is a legal entity that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this debt arrangement is a bank, the debtor is more often referred to as a borrower.

Insolvency State of being unable to pay ones debts

In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

In the United Kingdom, only an authorised or licensed insolvency practitioner (IP) may be appointed in relation to formal insolvency procedures.

Bankruptcy in the United Kingdom is divided into separate local regimes for England and Wales, for Northern Ireland, and for Scotland. There is also a UK insolvency law which applies across the United Kingdom, since bankruptcy refers only to insolvency of individuals and partnerships. Other procedures, for example administration and liquidation, apply to insolvent companies. However, the term 'bankruptcy' is often used when referring to insolvent companies in the general media.

An individual voluntary arrangement (IVA) is a formal alternative in England and Wales for individuals wishing to avoid bankruptcy. In Scotland, the equivalent statutory debt solution is known as a protected trust deed.

When an individual been made bankrupt in the UK it's legal and advisable to have a make use of an IVA referred to as a "fast-track individual voluntary arrangement" which implies the bankruptcy order can be annulled if all the terms have been fulfilled. It is necessary to put forward a payment proposal to the creditors that allows them to be paid more than they would under the standard bankruptcy order. The official receiver runs the FTVA for the individual if they agree with the proposal. The fast-track individual voluntary arrangement is cheaper than an ordinary IVA as there are set fees and costs.

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. In most cases personal bankruptcy is initiated by the bankrupt individual. Bankruptcy is a legal process that discharges most debts, but has the disadvantage of making it more difficult for an individual to borrow in the future. To avoid the negative impacts of personal bankruptcy, individuals in debt have a number of bankruptcy alternatives.

Insolvency Act 1986 United Kingdom legislation

The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.

As a legal concept, administration is a procedure under the insolvency laws of a number of common law jurisdictions, similar to bankruptcy in the United States. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – in the United Kingdom colloquially called being "under administration" – is an alternative to liquidation or may be a precursor to it. Administration is commenced by an administration order.

Debt relief orders (DROs) are a simplified, quicker and cheaper alternative to bankruptcy as an insolvency measure in the United Kingdom, which came into effect in England and Wales on 6 April 2009, and are also offered in Northern Ireland.

United Kingdom insolvency law Law in the United Kingdom of Great Britain and Northern Ireland

United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. "Insolvency" means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is "liquidated", so that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the Insolvency Regulation (EC) 1346/2000 and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.

Under UK insolvency law an insolvent company can enter into a company voluntary arrangement (CVA). The CVA is a form of composition, similar to the personal IVA, where an insolvency procedure allows a company with debt problems or that is insolvent to reach a voluntary agreement with its business creditors regarding repayment of all, or part of its corporate debts over an agreed period of time. The application for a CVA can be made by the agreement of all directors of the company, the legal administrators of the company, or the appointed company liquidator.

Bankruptcy in Irish Law is a legal process, supervised by the High Court whereby the assets of a personal debtor are realised and distributed amongst his or her creditors in cases where the debtor is unable or unwilling to pay his debts.

A Personal Insolvency Arrangement (PIA) is a statutory mechanism in Ireland for individuals who cannot repay their debts as they come due but who wish to avoid bankruptcy. The arrangement is one of the three alternatives authorized under Ireland's Personal Insolvency Act 2012; Debt Settlement Arrangements (DSA) and Debt Relief Notices (DRN) are the other two arrangements. A PIA is a legal agreement between a debtor and their creditors that is mediated and administered by a Personal Insolvency Practitioner (PIP). A PIA usually lasts for a term of six years and must include both unsecured debt and secured debts.

British Virgin Islands bankruptcy law

British Virgin Islands bankruptcy law is principally codified in the Insolvency Act, 2003, and to a lesser degree in the Insolvency Rules, 2005. Most of the emphasis of bankruptcy law in the British Virgin Islands relates to corporate insolvency rather than personal bankruptcy. As an offshore financial centre, the British Virgin Islands has many times more resident companies than citizens, and accordingly the courts spend more time dealing with corporate insolvency and reorganisation.

Cayman Islands bankruptcy law

Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:

Hong Kong insolvency law

Hong Kong insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is now primarily governed by the Companies Ordinance and the Companies Rules. Prior to 2012 Cap 32 was called the Companies Ordinance, but when the Companies Ordinance came into force in 2014, most of the provisions of Cap 32 were repealed except for the provisions relating to insolvency, which were retained and the statute was renamed to reflect its new principal focus.

References

  1. ↑ Office for National Statistics, Number of UK Businesses down
  2. ↑ Office for National Statistics, UK Business Activity, Size And Location 2010 Archived 2011-05-06 at the Wayback Machine
  3. ↑ Business Link, Legal Structures: The Basics - Sole Trader
  4. 1 2 Business Link, Insolvency Outcomes For Partnerships And Sole Traders
  5. 1 2 "Insolvency Act 1986: Section 123". Crown. Retrieved 30 July 2014.
  6. ↑ Business Link, Avoid Insolvency: Improve Cashflow
  7. ↑ UK Insolvency Service: Statistics Release: Insolvencies In The Fourth Quarter 2010 Archived 2011-02-07 at the Wayback Machine
  8. ↑ "Insolvency Act 1986: Section 73". Crown. Retrieved 30 July 2014.
  9. ↑ UK Insolvency Service, A Guide To Bankruptcy Archived 2011-04-24 at the Wayback Machine
  10. ↑ UK Insolvency Service, Alternatives To Bankruptcy Archived 2011-07-09 at the UK Government Web Archive
  11. ↑ Accountant in Bankruptcy, Scotland's Insolvency Service Protected Trust Deeds
  12. 1 2 3 "Insolvency Act 2000". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  13. ↑ Third Party Mediation Business Rescue Archived 2010-11-14 at the Wayback Machine
  14. ↑ Smith, Mike. "Company Rescue; or Business Turnaround Solution". Archived from the original on 15 August 2014. Retrieved 30 July 2014.
  15. ↑ UK Insolvency Service, Bankruptcy Information Archived 2011-05-14 at the Wayback Machine
  16. ↑ DirectGov - Bankruptcy - A Guide
  17. ↑ UK Insolvency Service - Creditor’s Petitions Information from the Insolvency Service Archived 2011-02-21 at the Wayback Machine
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