How do I rescue my business as a sole-trader or partnership?

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.

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.

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.

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.

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.

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.

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.