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Sole Trader Insolvency

Whereas a company facing insolvency has various options, such as Liquidation, Administration, Administrative Receivership or Company Voluntary Arrangements, sole traders have only two: Bankruptcy or Individual Voluntary Arrangement (“IVA”).

Bankruptcy is considered by many as being the nuclear option, but in reality, it is sometimes the most sensible course to follow. It carries certainty, in that it brings a finite end to the business difficulties a sole trade will have been facing, often for many months, occasionally years and in most cases, a bankrupt is discharged a year after the bankruptcy order is made, giving the individual an opportunity to rebuild his life.

The downsides are however considerable. The value of all of the individual’s business and personal assets, with some exceptions, is realised to meet the costs of bankruptcy and make payments to creditors. In addition, until he is discharged, a bankrupt is prohibited from being a director of a limited company and cannot hold certain public offices, in addition to a number of other restrictions.

Nevertheless, Bankruptcy can be the least painful option for an insolvent sole trader to follow, especially if he has few or no personal assets and his occupation is such that Bankruptcy would not prevent him from following his career.

Bankruptcy can be initiated either by an unsecured creditor or by the individual himself. For an unsecured creditor to petition for the Bankruptcy of an individual he must be owed at least £750 (increasing to £5,000 in October 2015) and the debt must be undisputed. If the debt is disputed, it is likely that the creditor will need to issue court proceedings by way of a High Court Writ or County Court Summons, to obtain judgment on the debt. Once the court has delivered its judgment, the debt cannot be disputed, unless the judgment is subsequently set aside.

Once judgment is obtained, the creditor may petition for the Bankruptcy of the sole trader. Often however, he will issue a Statutory Demand, giving the trader one last chance to pay. If the trader fails to make payment, or agree a payment plan within twenty-one days of receiving the demand, he is deemed to be insolvent and a Bankruptcy petition may be issued by the creditor.

Where the trader decides to petition for his own Bankruptcy, he will apply to the court for the necessary forms, complete those and submit them to the court with the requisite fee and Official Receiver’s deposit. For those on income support, it is possible that the court fee will be waived.

The forms at first sight, may appear to be somewhat daunting, but their completion is relatively straight-forward.

Once the forms have been submitted and the fees paid, the court will allocate a hearing date at which the Bankruptcy Order will be made.

Once the trader has been made Bankrupt, he will be required to attend at the Official Receiver’s Office to be questioned in connection with his assets and liabilities and the reasons for his insolvency.

As an alternative, it may be possible for the trader to propose an IVA to his creditors. This process is most relevant following the occurrence of a specific event, or series of events that has given rise to the insolvency of the business, which has been identified and the effect neutralised, or where Bankruptcy would result in the trader being prohibited by his professional body or trade association from pursuing his occupation.

In either case, it is essential that the ongoing business is viable. If it is not, then an IVA is unlikely to succeed.

An IVA is a contract entered into between the trader and his unsecured creditors, whereby in exchange for forbearance on the part of the creditors, the trader undertakes to fulfil certain defined obligations throughout the term of the IVA. These obligations will invariably include making contributions out of future profits in accordance with a formula laid down in the proposal, meeting all future liabilities as and when they fall due and may include the realisation of certain assets. The contributions out of future profits and asset realisations will be paid to a Licensed Insolvency Practitioner, who will utilise them to meet the costs of the IVA, with any surplus being distributed among the unsecured creditors.

In the event of default by the trader during the term of the IVA, which can be up to five years, is likely to result in his Bankruptcy.

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