Sole Trader Insolvency
Encyclopedia
According to the Office for National Statistics
, sole proprietors represented 23.8% of all UK enterprise in 2010. Of that number, more than half a million sole traders
were operating via the PAYE or VAT system alone. Sole traders are a distinct legal entity, operating as one type of UK business structure. In the event of financial problems affecting the business, they are subject to different rules to those that govern companies.
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 creditor
s. Insolvency does not automatically equate to bankruptcy; Definitions of insolvency are provided within the 1986 Insolvency Act
. 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. According to Business Link
there are a number of factors that can lead to sole trader insolvency. These can include late invoicing for good or services, accepting orders that exceed its financial capacity to deliver, failure to recover debts, excess inventory and unsuitable credit arrangements.
Sole traders make all operational decisions and are solely responsible for raising business finance. They can invest their own capital into the business, or may be able to access business loans and/or overdrafts. Unlike limited companies or partnerships, it is not necessary to share decision making or the profits.
The simplicity of this structure also has its limitations. Unlike forming a limited company, it lacks the clear cut definition between personal and business income from the perspective of the tax authorities. The business owner is personally liable for income tax and National Insurance contributions due for the business profits in each given tax year. They are also personally liable for any debts the business incurs. Business analysts may advise sole traders to form a limited company in order to access greater levels of financing, for example for expansion plans. This can limit their personal liability; business lenders may be more inclined to co-operate with a limited company. It can also be the case that within certain industries it is easier to secure work if presenting potential business partners with a limited company structure
.
(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. This represented an improvement on the number of bankrupt sole traders during the previous year and up to June 2010.
and Individual Voluntary Arrangements. It also makes provision for company insolvency
Bankruptcy laws
vary somewhat between Scotland, Northern Ireland, Wales and England. In England, Wales & Northern Ireland, the applicable law is the Insolvency Act 1986. 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.
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. In Scotland, the Protected Trust Deed
serves a similar purpose.
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.
.
Office for National Statistics
The Office for National Statistics is the executive office of the UK Statistics Authority, a non-ministerial department which reports directly to the Parliament of the United Kingdom.- Overview :...
, sole proprietors represented 23.8% of all UK enterprise in 2010. Of that number, more than half a million sole traders
Sole proprietorship
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits and has unlimited responsibility for...
were operating via the PAYE or VAT system alone. Sole traders are a distinct legal entity, operating as one type of UK business structure. In the event of financial problems affecting the business, they are subject to different rules to those that govern companies.
Overview
Sole trader insolvencyInsolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
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 creditor
Creditor
A creditor is a party that has a claim to 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 or...
s. Insolvency does not automatically equate to bankruptcy; Definitions of insolvency are provided within the 1986 Insolvency Act
Insolvency Act 1986
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.-History:...
. 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. According to Business Link
Business Link
Business Link is a government-funded business advice and guidance service in England. It consists of an online portal managed by HMRC, local/regional advisors and a national helpline.-History:...
there are a number of factors that can lead to sole trader insolvency. These can include late invoicing for good or services, accepting orders that exceed its financial capacity to deliver, failure to recover debts, excess inventory and unsuitable credit arrangements.
Sole trader
A sole trader is the simplest type of business structure defined in UK law. It refers to an individual who owns their own business and retains all the profits from it. When starting up, sole traders must complete a straightforward registration with HM Revenue and Customs as self-employed for tax and National Insurance purposes. They are responsible for maintaining the businesses records and submitting an annual Tax return for all income from self-employment and other work.Key advantages and disadvantages of being a sole trader
Becoming a sole trader is relatively simple compared to other business structures. It can rapidly enable a business to begin trading; the requirements for record keeping are far more straightforward than other business structures.Sole traders make all operational decisions and are solely responsible for raising business finance. They can invest their own capital into the business, or may be able to access business loans and/or overdrafts. Unlike limited companies or partnerships, it is not necessary to share decision making or the profits.
The simplicity of this structure also has its limitations. Unlike forming a limited company, it lacks the clear cut definition between personal and business income from the perspective of the tax authorities. The business owner is personally liable for income tax and National Insurance contributions due for the business profits in each given tax year. They are also personally liable for any debts the business incurs. Business analysts may advise sole traders to form a limited company in order to access greater levels of financing, for example for expansion plans. This can limit their personal liability; business lenders may be more inclined to co-operate with a limited company. It can also be the case that within certain industries it is easier to secure work if presenting potential business partners with a limited company structure
Limited company
A limited company is a company in which the liability of the members or subscribers of the company is limited to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. And the former of these, a limited company limited by shares, may be...
.
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 ServiceInsolvency Service
The Insolvency Service is an executive agency of the United Kingdom's Department for Business, Innovation and Skills which:* administers and investigates the affairs of bankrupts, of companies and partnerships wound up by the court, and establishes why they became insolvent;* acts as...
(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
Debt Relief Order
Chapter 4 of the Tribunals Courts and Enforcement Act 2007 introduced Debt Relief Orders as a new form of bankruptcy in the United Kingdom. A DRO will be a simplified, quicker and cheaper alternative to bankruptcy in the United Kingdom, suitable for debtors who have few or no assets and little...
(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. This represented an improvement on the number of bankrupt sole traders during the previous year and up to June 2010.
Insolvency Act 1986
This legislation provides the legal framework for two key formal insolvency solutions relevant to sole traders: namely bankruptcyBankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
and Individual Voluntary Arrangements. It also makes provision for company insolvency
Bankruptcy laws
Bankruptcy in the United Kingdom
Bankruptcy in the United Kingdom does not have a singular law. There is one system for England and Wales, one for Northern Ireland and one for Scotland.Across the United Kingdom, bankruptcy refers only to insolvency of individuals and partnerships...
vary somewhat between Scotland, Northern Ireland, Wales and England. In England, Wales & Northern Ireland, the applicable law is the Insolvency Act 1986. 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.
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
Insolvency practitioner
In the United Kingdom, only an authorised or licensed Insolvency Practitioner may be appointed in relation to formal insolvency procedures.Quite often IPs have an accountancy background...
and are an agreement that the individual will repay agreed instalments over a fixed period of time. In Scotland, the Protected Trust Deed
Protected Trust Deed
A trust deed is a voluntary but formal arrangement that is used by Scottish residents where a debtor grants a ‘trust deed’ in favour of the trustee which transfers their estate to the trustee for the benefit of creditors. It can be a way for people to deal with debt problems...
serves a similar purpose.
Insolvency Act 2000
This act was introduced in two stages: the 2nd of April 2001 and the 1st of 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.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.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
High Court of Justice
The High Court of Justice is, together with the Court of Appeal and the Crown Court, one of the Senior Courts of England and Wales...
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.
Voluntary arrangements
It may be possible to continue to trade by negotiating with creditors to gain more flexible payment arrangements. 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 proposalIndividual Voluntary Arrangement
In the UK, an Individual Voluntary Arrangement is a formal alternative for individuals wishing to avoid bankruptcy.The IVA was established by and is governed by Part VIII of the Insolvency Act 1986 and constitutes a formal repayment proposal presented to a debtor's creditors via an Insolvency...
.