If, as a sole trader or partner, you have concerns that your business is in financial difficulty it is best to seek advice as soon as possible. This article will explore the different advice and options available to you, either through your accountant or a Licensed Insolvency Practitioner. 

Options to explore with your accountant

If your business is in financial difficulty, the first step is to speak to your accountant. They'll likely offer the following options to explore. 

 

Re-finance

It could be that the business simply requires finance and your accountant could assist with cash flow forecasts and loan applications, ensuring that the finance, used appropriately, will save the business.

 

Time to Pay arrangement

If the business has fallen behind on paying HMRC in respect of PAYE/National Insurance and VAT, your accountant can assist in seeking a Time to Pay arrangement, allowing the business to make installments, normally over a period of either 6 or 12 months.

This will improve cash flow and decrease the likelihood of HMRC taking enforcement action.

 

Informal arrangement

Similar to a Time to Pay arrangement, if you have other creditors to pay (i.e. suppliers who you owe money to) and know you will be able to pay them in full but need more time, you can seek to agree on an informal arrangement. You can also seek agreement to freeze interest on the money you owe.

 

Advantages of an informal arrangement

Disadvantages of an informal arrangement

Provides a breathing space, allowing the debtor to regain control of finances.

It can be difficult to reach agreement with all creditors

Possibility of no professional costs.

Creditors are unlikely to freeze interest, thus increasing the term of the arrangement.

 

There is a likelihood that creditors will require regular review and perhaps an adjustment to the scheme.

What is a Debt Management Plan (DMP)?

It may be that you need assistance from either a licensed debt management company or a Licensed Insolvency Practitioner. They may offer a Debt Management Plan (DMP) as an option. 

A DMP is a formal agreement between you and your creditors to pay all of your debts. They are usually used when either:

  • you can only afford to pay creditors a small amount each month
  • you need time to pay, you will be able to make repayments in a few months.

You can arrange a plan with your creditors yourself or through a licensed debt management company for a fee.

 

Advantages of a DMP

Disadvantages of a DMP

Provides a breathing space, allowing the debtor to regain control of finances.

Creditors cannot be forced into agreement. Only one creditor needs to dissent to frustrate the plan.

Lower monthly payments than currently being made to creditors.

Creditors are unlikely to freeze interest thus increasing the term of the plan.

Low cost to the licensed debt management company, usually a percentage of the monthly payment.

Creditors are unlikely to forgive debt.

 

Creditors can change the terms of the plan.

 

The DMP is not specifically registered on your credit file but reduced payments to creditors could impact on your rating.

What is an Individual Voluntary Arrangement (IVA)?

An Individual Voluntary Arrangement (IVA) is a formal arrangement with your unsecured creditors, providing a breathing space for the business; assisting cash flow and can involve debt forgiveness.

Your Licensed Insolvency Practioner will act:

  • first as an Advisor, making sure an IVA is right for you as the individual (debtor)
  • secondly as the Nominee to assist you to draft the IVA proposal
  • as the Supervisor once the IVA is approved. 

In the majority of IVA cases the debtor makes affordable agreed monthly payments to the Supervisor who in turn distributes the money on a pro rata basis amongst the creditors. The term can vary, typically it can be up to five years. The amount paid to creditors can be a repayment in full or a percentage of the debt. 

Some IVAs will involve other payments from the debtor into the IVA, this could involve lump sum payments, perhaps due to the sale of an asset.

 

The IVA process

1. Speak to a Licensed Insolvency Practitioner. They will act as an Advisor first, discussing and reviewing your position then speaking through the options.

2. The Insolvency Practitioner will work with you to draft a proposal to creditors. This will detail:

  • The history of the business, the reasons why it is in financial difficulty and how it will avoid future problems.
  • The current financial position of the business and future predicted cash flows.
  • Your assets and liabilities, to include a list of creditors
  • The amount you can afford to pay into the IVA, the term, and the resulting return to creditors.

The insolvency practitioner, acting as Nominee, then issues the proposal to creditors.

3. Creditors vote to either approve, reject or modify the IVA.  At least 75% of voting creditors need to vote in favour of the IVA for it to be approved.

4. The IVA starts if approved and the debtor needs to adhere to the terms, making the payments as agreed. The Insolvency Practitioner acts as Supervisor, ensuring the payments are received, the creditors’ claims are agreed and distributions are made accordingly.

5. The IVA finishes once the terms have been met and the Supervisor issues the final report and a Certificate of Completion.

 

Advantages of an IVA

Disadvantages of an IVA

You are still able to run your business (the Insolvency Practitioner acts as Supervisor only, of the IVA).

You need to understand why the business has struggled and make appropriate changes to turn the situation around, otherwise despite the IVA you could find yourself in financial difficulty again.

The IVA provides a breathing space from creditors. Once approved all creditors are bound by the IVA and cannot take legal action.

At least 75% of creditors that vote need to approve the IVA; there is a risk that creditors will not agree.

You pay an affordable monthly payment each month.

You will have to adhere to the terms of the IVA otherwise the Insolvency Practitioner will have to terminate the arrangement, which could lead to you being declared bankrupt.

Creditors’ debts are frozen - no interest or charges can be applied once the IVA starts.

The IVA is registered on the Individual Insolvency Register. It’s removed three months after the IVA ends. Your credit file will also show the IVA, for a minimum of six years from the date of arrangement, and longer if the arrangement lasts more than six years. During the IVA term, you will find it more difficult to seek credit.

An IVA is a cost-effective alternative to other insolvency procedures.

 

Some of the debt can be written off.

 

There is less stigma to an IVA than bankruptcy.

 

 

If there are a number of partners in a business a Partnership Voluntary Arrangement (PVA) can be proposed to creditors, similar to an Individual Voluntary Arrangement (IVA) as noted above. Alternatively, each partner can propose their own IVA which is more likely if they have additional debts owed solely, for example, credit card borrowings or a personal loan.

What is a Debt Relief Order (DRO)?

Debt Relief Orders enable debts to be written off if:

  • you owe less than £20,000
  • your assets do not exceed £1,000
  • your surplus income does not exceed £50 per month after paying essential personal and household spending.

You would make an application through an authorised debt adviser, to the Official Receiver (an officer of the bankruptcy court) who will grant the DRO if appropriate.

The DRO costs £90 and will last for one year.

 

Advantages of a DRO

Disadvantages of a DRO

Your debts will be written off at the end of the year.

Debts must be less than £20,000 so may not be appropriate, in which case you will have to go bankrupt.

Lower cost than bankruptcy.

You cannot apply for a DRO if you own your house, even if there is no equity in it.

The £1,000 asset limit does not include clothing, furniture and a domestic motor vehicle worth up to £1,000.

You may have to disclose your DRO if you wish to open a new bank account.

No further action can be taken by your creditors listed on the DRO, without the court’s permission.

The DRO is registered on the Individual Insolvency Register. It’s removed three months after the DRO ends. Your credit file will also show the DRO, for a minimum of six years from the date the DRO. During the DRO term, you will find it more difficult to seek credit.

 

In addition to the disadvantages listed above, there are restrictions you must follow if you get a DRO, meaning you will be unable to:

  • obtain credit of more than £500 without disclosing the DRO to the lender
  • act as a director of a company.
  • create, manage or promote a company without the court’s permission
  • manage a business without telling those you do business with about your DRO.

What is bankruptcy?

If you are unable to pay your creditors then bankruptcy enables your debts to be written off.

Creditors who are owed £5,000 or more can petition for your bankruptcy, alternatively, you can declare yourself bankrupt by applying online. Your application will be reviewed by an Adjudicator (working at the Insolvency Service, a government agency) and granted if appropriate. After this, you may be interviewed by the Official Receiver (an officer of the bankruptcy court) in respect of your situation.

The cost of making yourself bankrupt is £680.  Normally you are discharged (released) from bankruptcy after a year.   

 

Advantages of bankruptcy

  • Your debts will be written off.
  • You will normally be discharged after one year.
  • You usually keep any money you’ve put into a pension.

 

Disadvantages of bankruptcy

  • Your assets are to be realised, which may result in you losing your home.
  • You may be required to make monthly payments of surplus income into your bankruptcy estate, over a three-year period.
  • You may be restricted on working.  A few examples you cannot be, if bankrupt, are:​​​​​​​
    • Charity trustee
    • Justice of the Peace
    • Registrar of births, marriages, and deaths
  • MOT authorised examiner.
  • You have to disclose your bankruptcy if you wish to open a new bank account.
  • There are restrictions you must follow if you are bankrupt, resulting in that you are unable to:
    • Obtain credit of more than £500 without disclosing your bankruptcy to the lender.
    • Act as a director of a company.
    • Create, manage or promote a company without the court’s permission.
    • Manage a business with a different name without telling those you do business with that you’re bankrupt.
  • Your bankruptcy is registered on the Individual Insolvency Register. It’s removed three months after the bankruptcy ends. Your credit file will also show the bankruptcy, for a minimum of six years from the date the bankruptcy order was made. During the bankruptcy term, you will find it more difficult to seek credit.

Next Steps

Go to GOV.UK to find out more about Debt Management Plans (DMP)

A DMP is a formal agreement between you and your creditors to pay all of your debts.  

Read more

Go to GOV.UK to find out more about Individual Voluntary Arrangements

An IVA is a formal arrangement with your unsecured creditors, providing a breathing space for the business; assisting cash flow and can involve debt forgiveness.

Read more

Stay informed

Register or Login to add this article to your reading list.

Share this