Not many would have assumed that over a year after taking them that a large minority, if not majority in some industries such as hospitality, bars or nightclubs, would not have been able to begin trading at all in some circumstances, let alone fully.
We’ve covered the problems facing these businesses in earlier blogs as well as the small and closing window of opportunity for companies to implement rescue and restructuring plans ahead of creditor actions such as winding up petitions resuming and the CJRS furloughs ending at the end of September.
But what about sole traders and partnerships facing the same issues?
Limited companies have established legal protections that stop creditors from pursuing individual directors and owners for debts - unless a personal guarantee was given - but sole traders and partnerships don’t have this shield.
When applying for bounce back loans, the British Business Bank stated that sole traders and partnerships had to have been given sufficient information about the borrowing and incurred debts and repayments before any finance was given, under the provisions of the Consumer Credit Act.
If this wasn’t adhered to by the lender underwriting the agreement and providing the funds then they would lose their ability to collect repayments on the loan - although they would be expected to challenge this. The onus would be on the borrower to prove they hadn’t been adequately informed either at the time or during the course of the agreement.
The Consumer Credit Act doesn’t apply to the bounce back loan scheme in its entirety although not all of its protections were removed, meaning the information requirement remained and that the collection of the loans were still regulated meaning that lenders would still have to comply with the relevant regulations should borrowers encounter financial difficulties.
Additionally, lenders were not permitted to ask for or seek any personal guarantees for access to the bounce back loan scheme.
Sole traders and members of a partnership are often used to risking their personal assets when borrowing so would be reassured that under the terms of the bounce back loan scheme, no recovery action can be taken by lenders over either a principal private residence or a primary personal vehicle - their home or car.
This doesn’t mean that they cannot be pursued for outstanding bounce back loan debts or unpaid installments. Their other personal assets may still be at risk of recovery action from the end of September.
One other important caveat partnerships or sole traders who borrowed under the scheme should be aware of - they should not have been in financial trouble when they obtained the finance.
From September 2020, an additional undertaking was inserted into the bounce back loan borrowing conditions making this requirement clear.
The definition of a “business in difficulty” is that partnerships should not have accumulated losses greater than half of their capital in their most recent annual accounts - although this does not apply to firms three years old or less.
For sole traders the requirement was that they should not have been in an active insolvency procedure while they sought the funding.
The biggest problem for sole traders to overcome if they can’t repay their bounce back loans, is that legally, there’s no difference between personal and business assets. This means that any business debt is personally owed and therefore recoverable from personal assets.
Creditors can and will use high court enforcement officers or bailiffs to obtain whatever they can to sell and regain some of their funds.
These too are currently limited (although not if the company was considered insolvent before the Coronavirus lockdowns started in March 2020) but are scheduled to return within ten weeks.
If a sole trader is in financial difficulty and can’t make bounce back loan repayments or other debts then they have insolvency options but not as many as a limited company or even a partnership so it’s even more important that they get professional advice at the earliest opportunity.
Chris Horner, Insolvency director with Businessrescueexpert.co.uk said: “One of the main advantages of running a business as a sole trader or in a partnership is less administration and more agility than a limited company can supply.
“A drawback is that if they meet financial headwinds, then they don’t have the range of protection enjoyed by companies - they have more personal exposure.
“But this doesn’t necessarily mean the worst. If they take action early enough to satisfy creditors including bounce back loan lenders then they can still continue to trade, if viable, and repay their debts while they do it.
“Alternatively, they can take advantage of specific insolvency protection for sole traders or individuals called an Individual Voluntary Arrangement (IVA).
“It operates in a similar way to how a CVA or company voluntary arrangement operates for a limited company allowing them to pay off debt in a series of manageable monthly payments while a proportion of the remaining debt is written off.
“No matter what issues partnerships or sole traders might be facing - if they get professional advice quickly enough, they will have options to change course.”
The bounce back loan scheme might have been a new initiative but the problems if a partnership or sole trader can’t repay it is not.
Even though the scheme was government backed to encourage lenders to be more generous than they might otherwise have been to prospective borrowers, we’re seeing increasing evidence that recovery action is more aggressive and sustained than you may expect.
This is because the government is increasingly demanding evidence from lenders that they have made genuine efforts to recover any debts before they can even begin to apply to have their funds reimbursed.
Given this, if you think you might not be able to repay your bounce back loan or any other borrowing in full, or if you’ve missed payments already - you should get in touch with us as soon as you can.
We offer a free consultation for sole traders or partners where they can outline what issues their business is facing and we can listen and let them know, often to their surprise, that they can take action to save it.
The quicker they act, the more options they will have to choose from and more time to implement them effectively.
The clock is ticking down for creditors actions to be allowed again so why waste any more time?
This is why it is so important that you do your homework in the first instance and work with a reputable insolvency practitioner with a strong track record who will communicate with you at every stage of the process so you won’t have any reason to change.
Any good firm will let you know in advance what will happen at each stage of the insolvency process, what they will do for you to facilitate it and what your and their responsibilities in the process will be.
They will look at what other insolvency options are available to you including debt management plans, debt relief or administration orders, other cash flow solutions including invoice factoring and possibly bankruptcy.
Advisor, nominee, supervisor
The role of your appointed insolvency practitioner will change throughout the process. They begin as an advisor, bringing all the realistic insolvency options to your attention and considering whether an IVA would be the best option for your situation. If it is, then they will assist you in preparing the proposal.
Once completed, their role changes and they become known as the nominee. In this stage they will prepare their own report to your creditors which details what investigations have been carried out to support your proposals and recommend whether they should be accepted or not. The nominee forwards their report and your proposals to your creditors and gets a decision from them on whether your proposal should be approved or not.
If the IVA is approved by creditors then the role of the insolvency practitioner changes yet again - they become the supervisor. Now their job is to ensure that the terms of the IVA are being met by all parties and to balance your interests with those of your creditors.
Raising your concerns
If you’re concerned or unhappy with how your IVA is unfolding then there are some options available to consider;
You first recourse should always be to contact your insolvency practitioner and discuss your concerns with them. Contact them by phone or email immediately and they will be able to let you know what they can do to help. You should follow up in writing if you are unsatisfied with their first response in this instance.
If your concerns remain unresolved then you can get in touch with the Insolvency Service. Please be aware that the Insolvency Service will only look into your complaint on the grounds that your insolvency practitioner has behaved either unprofessionally, unethically or improperly.
They are unable to intervene in your IVA or to alter or reverse any decision the insolvency practitioner has made. Only a court has the power to do this and legal costs can potentially be very expensive.
Stopping my IVA
An IVA can be stopped at any time by letting it fail but there are some important points to consider before embarking on this course of action.
Once an IVA has failed then it is possible to start a new IVA from scratch with another insolvency practitioner but your debts are likely to remain outstanding and if a large amount of that debt is owed to HMRC then you may be forced into bankruptcy.
Any payments from your previous IVA will be lost and you will be starting a new payment schedule from scratch while the new insolvency practitioner will have to begin the advisor, nominee, supervisor process again too. Your creditors may not be too happy with the IVA failing and may be less willing to help or accept your proposals for a new IVA.
Clearly one of the most important choices you face in the process is selecting an insolvency practitioner with the experience and skills to work closely with you and give you the best chance of navigating the insolvency minefield and getting on with your life.
Contact us today to set up a meeting and we can begin to work with you on proposals to resolve your insolvency issues.
Email us at email@example.com or use our contact form here.
As mentioned above, there is a level of uncertainty surrounding bankruptcy which we are aiming to clear with this article.
Filing for bankruptcy can be done on the government website, where you will have to pay a £680 charge (which you will not get back one you have been discharged from bankruptcy). A trustee in bankruptcy will then be appointed and will take control of your personal assets, attempting to recoup as much as possible for your creditors.
As a general rule of thumb, your bankruptcy order will be complete within 12 months. In some cases, if the Official Receiver believes that you have behaved fraudulently, he can apply to have the bankruptcy extended - this is called Bankruptcy Restriction Order. Once the bankruptcy has been completed, your information will be removed from the Insolvency Register and you can begin rebuilding your credit file.
More information on how bankruptcies work and the bankruptcy procedure - from start to finish - can be found here.
As mentioned above, there is a substantial air of uncertainty surrounding bankruptcy for many. To make the process a little easier, we take a look at some common myths and share our debt management advice below:
Many believe that filing for bankruptcy will see them lose all items. However, you will, likely, be able to keep many of your possessions. Once a bankruptcy order is made, the property belonging to you is treated as the ‘bankrupt’s estate’. Likewise, any property that is acquired during the personal insolvency procedure is also considered as part of that estate. However, it is the extent of what is relinquished that many find confusing.
While it is true that the bankruptcy trustee will take control of your assets and freeze your accounts, you will not be left without your possessions. For instance, tools, equipment, cars and anything else that is required for your business of employment - otherwise known as ‘tools of the trade’ - is yours to keep. If you can’t work, you cannot earn a living and generate money to repay your creditors. Therefore, those possessions will be left alone during the procedure. Similarly, essential household items will not be taken, such as bedding, clothing, furniture and household equipment that satisfy the basic needs for your family and those living in the home.
It’s also important to note that the trustee has several options for your home during bankruptcy, and as such, they will request that an agent carry out a valuation of your property. However, it can be possible for you to keep your home when filing for bankruptcy, and we have outlined those options here.
It’s critical that you are open and honest with your bankruptcy trustee regarding your assets. Any hidden assets or non-disclosures will result in severe consequences, with the trustee even able to suspend your bankruptcy order indefinitely. Essentially, this means there is no end to the bankruptcy consequences upon you. The trustee will take care of your finances and propose a realistic debt management plan, so you must disclose all information. Not doing so could see you attend a public examination, which could, subsequently, result in an arrest warrant if you did not show.
As mentioned earlier, it may be possible to keep your vehicle - especially if you use it for your trade. If you require the vehicle for employment, then you will likely be able to retain the possession to generate your income. However, this point also depends on the whether the car is owned by you, or subject to finance, as well as the value of the vehicle. For instance, there is no need for a high-value car for travel, if a mid-priced hatchback would do the same job.
Another of our common bankruptcy myths is that everyone will know you have filed for bankruptcy. It is true that official notices of your bankruptcy petition will be placed in The Gazette, with your information also filed publicly on the Insolvency Register, but those are for the benefit of your creditors. It’s highly likely that financial institutions - as opposed to your neighbours and family - will be aware of the notices, unless you are a celebrity, of course. However, if you are worried, seek debt management advice from your trustee.
This is another one of the more common bankruptcy myths, and is certainly not true. It is not in the interests of your trustee - or creditors - to prevent you from working, particularly as you need an income to make repayments and fulfil the debt management plan. When it comes to how bankruptcies work, you can, most definitely, carry on working.
There are, however, exceptions to the rules, especially for those that are currently working as directors. You will need an exemption from court to continue in such roles. You must also note that bankruptcy may affect positions within the finance sector, and can also offer restrictions on the ability to obtain credit. If you are concerned about the consequences of your career and credit, we suggest you seek immediate insolvency advice as soon as you notice the potential signs of bankruptcy.
Your creditors can petition for your bankruptcy. They can only do this, however, if they are owed more than £5,000. The procedure for the creditors is costly, so is considered a last resort - but you should not ignore the petition.
Generally, creditors will send a formal demand for payment, otherwise known as a ‘statutory demand’. This demand may then be followed by a bankruptcy petition. If you receive a statutory demand, seek insolvency advice as a priority to avoid the worst case scenario.
Typically, bankruptcy lasts around 12 months, with many bankruptcy myths suggesting a much longer time period. The bankruptcy will be listed on your credit file for six years after you have been discharged, but you will be removed from the Insolvency Register once completed.
The time period for bankruptcy has been reduced from three to one year, which many believe works in their favour. However, if you believe that staying away from your bankruptcy trustee for the year will see you automatically discharged, you are wrong. The trustee can apply to suspend the automatic discharge, meaning you will have to continue to make repayments. It’s also possible that your discharge could be suspended indefinitely, so there is no end to your order in sight.
The best thing you can do is to cooperate with your trustee who is, essentially, working to repay your creditors and ensure your financial situation improves.
Another of the common bankruptcy myths is that it is possible to keep assets safe by disposing of them before the bankruptcy order. However, if you attempt to repay a creditor and put a ‘preference’ on them above others, the trustee has the power to to obtain the payment from the beneficiary and put back into your estate in an attempt to satisfy all creditors.
If you dispose of assets and sell them at less than their market value, this is referred to as ‘transactions at an undervalue’. The payments can be set aside if the sale took place five years prior to filing for bankruptcy.
There’s no denying that a bankruptcy order will substantially affect your ability to gain credit for a period of six years, and slightly longer as you begin to rebuild your credit file. However, where bankruptcy is the best option for you moving forward, you will find there are many lenders who solely provide advice and help the credit reports of those who have undergone bankruptcy.
If you have any queries regarding the procedure and what to expect, our business rescue experts can provide confidential, insolvency advice to help you find the best solution for your financial issues.
Following a bankruptcy petition, a trustee in bankruptcy must seek to maximise realisations for creditors. They will look at your surplus income in order to do this. When you are interviewed by the official receiver, they will ask you to complete an income and expenditure form, setting out your monthly spending. If surplus income is available, following the review, you will be required to make monthly payments for 36 months as a contribution to your bankruptcy estate.
When considering the monthly payments for an income payments agreement, the trustee in bankruptcy will look at what you have left each month, after what is considered essential expenditure. If you are solely on income from benefits, then you will not be required to pay. However, any salary or maintenance income will be considered. You will be required to pay in 100% of any surplus income each month, starting from a surplus of £20. If your surplus is less than £20, you will not be required to set up an income payments agreement. However, the trustee will look to reassess your financial position ahead of your discharge from bankruptcy.
Only spending considered as essential for day-to-day life will be considered allowable by the trustee. These spends will be capped in line with spending guidelines for your circumstances. For example, if you live alone but spend £400 per month on food, you would be expected to cut this down to around £200 per month, perhaps by changing to a budget supermarket. An income payments agreement will expect you to be more frugal with your budgeting, seeking to assist you with money management moving forwards.
Other allowable expenses include:
A number of expenses not considered allowable include:
These lists are not exhaustive. If your circumstances change, for the better or the worse, you must contact your trustee in bankruptcy immediately.
If you don’t agreement with the amounts requested by your trustee in bankruptcy, the last thing you should do is ignore the issue. This will, likely, result in the trustee seeking an income payments order through the court. You should contact the trustee and present the reasons you should be allowed additional expenditure to be taken into account, when calculating your income payments agreement. Accepted reasons for additional expenditure may include:
If you continue to engage with the trustee, the amount due under the income payments agreement can be negotiated. They can also allow a £10 per month contingency, per member of your household, to allow a little more breathing space.
As previously mentioned, if you fail to respond to a request for an income payments agreement, the trustee will likely apply to the court for an income payments order. Under an income payments order application, a judge will be presented with your income and expenditure information. They will then assess the level of your payments.
If you are near the point when you have been bankrupt for a year, the trustee will also seek to have your discharge from bankruptcy suspended. This means that you will be subject to continuing restrictions of bankruptcy until you either enter the income payments agreement, or payments have been secured under the income payments order. You should bear in mind that when discharge is suspended, this opens a longer window in which assets such as a windfall or inheritance will be caught, which would otherwise be excluded from the bankruptcy.
Overall your best bet is to cooperate and negotiate with the trustee in bankruptcy when asked to make payments of an income payments agreement. You should also note that if you have significant assets, annulment may be more appropriate. If you seek to go down this route you must act quickly after the bankruptcy order has been made. Our business rescue experts can help you take decisive action to secure your financial position.
IVAs were, originally, established as an alternative to bankruptcy. For an individual with assets, an IVA is often considered the most suitable option, offering protection over those assets. Similarly, the arrangement provides the necessary breathing space for those suffering financially and is a less ‘extreme’ option to that of bankruptcy.
Bankruptcy, on the other hand, is a procedure that is dealt with in a much shorter period than an IVA. Generally, individuals are discharged from their bankruptcy order within 12 months. However, your individual assets will, likely, be forfeit during the bankruptcy, and it can offer more severe consequences for your financial and career status.
As mentioned above, this article will outline whether to opt for an IVA or bankruptcy, discussing the advantages and disadvantages of each.
A primary difference between IVA and bankruptcy is the effect on your home. If you own a home during your IVA, you will not be forced to sell. However, you could be asked to remortgage the home six months prior to the end of your IVA. It’s important to note that you will only be asked to do so if it is affordable. If not, an additional 12 months may be added to the IVA procedure. This is something you should be aware of this when seeking initial IVA advice.
Entering bankruptcy, however, will likely, affect your home. If you have equity tied up in your house, it’s highly possible that you will have to sell. If there isn’t any equity, you may be able to keep your home.
Another difference between IVA and bankruptcy relates to your vehicle/s. An IVA lasts much longer than bankruptcy and, therefore, you will be able to keep your car - especially if needed for your job etc. However, the same cannot always be said for a bankruptcy procedure, unless it is of very low value. If you do require your car, you must speak to the trustee immediately to determine the position moving forward.
Filing for bankruptcy is substantially more likely to affect your career, particularly if you hold the title of company director. A consequence of bankruptcy is that an individual cannot act as a director of a limited company, where there is no such prohibition in an IVA. Similarly, individuals with jobs in finance and accountancy sectors, as well as law and property, will likely be affected. There are likely to at least be limitations on handling of client funds. It’s also very possible that some companies may not hire those who have undergone a bankruptcy procedure, but this is, typically, highlighted in the contract.
Your best option with regards to IVA or bankruptcy advice is to speak to your HR department or check with your professional membership body or trade union.
There are many differences between the two procedures but an IVA may be more suitable as:
More information on individual voluntary arrangements is available here.
On the other hand, filing for bankruptcy may prove a better option if:
More information on the assets that can be subject to removal during bankruptcy can be found here.
It’s also important to note that if your assets do not hold much value - such as under £1,000 - you may be better looking into a debt relief order.
Ultimately, there are differences between the two and there is a lot to consider for an IVA v bankruptcy. Above all, you must seek IVA and bankruptcy advice to ensure you choose the best solution. Our business rescue experts can take you through both procedures and discuss the most suitable arrangement.
After a bankruptcy order has been made, the trustee in bankruptcy has three years to deal with your matrimonial home as an asset in the bankruptcy. If it is not dealt with in this time, your stake in the property will revert back to you automatically. It should be noted that if you conceal the property, and the trustee discovers the property at a later date, case law will allow them three years to deal with the property from the date of discovery. Obviously, this could then mean that equity is even larger. In turn, this would require a larger sum to be raised to buy back the property.
Upon appointment, the trustee will register a restriction against your property. This will prohibit any action being taken with regard to the property without their consent. If your property is solely owned, restrictions will automatically be registered by the court up presentation of the bankruptcy petition. If the property is a family home where your partner and/or children also reside, the trustee will not be able to take any action in respect of your property for a period of one year from the bankruptcy order. However, after this time period the needs of the creditors is deemed to outweigh the families right to reside.
It is possible to avoid losing your home in bankruptcy, and the trustee’s options to deal with any equity in the property are listed below.
The trustee generally has several options to deal with the equity in your home in bankruptcy. In order to start the process, the trustee will request that an agent carries out a valuation of your property. This will be an RICS chartered surveyor rather than an estate agent to lower the variation in values. If you refuse to cooperate with the inspection, a drive-by valuation will be carried out instead. This will not take into account any wear and tear inside the property. Therefore, it is in your interest to cooperate with the internal inspection.
On receipt of the valuation the trustee in bankruptcy will calculate your share of the equity in the property. The following options then become available to realise the equity in your property:
These items are listed from the lowest impact and least expensive option to the most expensive and damaging option. You should bear in mind that, whilst these options appear harsh, the trustee in bankruptcy is on officer of the court carrying out their statutory duty to creditors of the company. They will act reasonably at all times and engagement with the trustee is the most appropriate way to deal with this moving forward.
The cheapest option available is for your partner, or another friend or family member, to buy out your interest in your property. As a result of no requirement to incur legal costs or costs of sale, the trustee in bankruptcy may be able to take this into account when considering your offer. However, any discount will not be significant unless the amount of equity in your property considerably exceeds the total value of your creditors. In this instance, it may be more appropriate to consider annulment of your bankruptcy.
Where you are paying an income payments agreement and the equity in your property is on the lower end of the scale, the trustee may consider accepting funds from you directly in lieu of equity from the property. Due to income payments agreements covering any surplus income you have, these funds would need to be paid after the income payments agreement has been completed.
In order to proceed with this, you will need to agree and value a legal charge with the trustee in bankruptcy. This is due to income payments agreements lasting three years. In the normal course of the bankruptcy, the trustee’s interest would expire before the end of the income payments agreement. Before giving a charge, you should note that the trustee will still be empowered to apply for possession and sale of your property if you fail to make payments.
If the equity in your property is £1,000 - £5,000 the trustee may apply a section 313 charge against your property, under the Insolvency Act 1986. This simply means that if you sell or transfer your property, this charge will need to be satisfied at this point. A section 313 charge does not give any powers to force the sale of your property, but simply leaves the trustee able to set their interest against the property for future realisation.
In the event there is equity in your property, and there is no prospect of raising funds to buy out the equity, it may be worth considering submitting to a voluntary sale. The benefits of this are:
The trustee will work with you on any voluntary sale of the property and seek to keep things amicable. They will consult with you, or any joint owner on matters such as sale price, agents and completion dates. While this does mean losing your home, it allows some control of the process as well as more funds for the joint owner towards a new home.
If all else fails or you do not cooperate with the trustee, the last resort of the trustee is an application for the possession and sale of your property. The trustee will always seek to engage with you and try every other course of action before resorting to this drastic course of action. Not only does this leave you in a position where you may be forcibly evicted from the property, but you or any joint owner will likely be liable to pay a costs order toward the application costs.
The trustee will make the application to court and a hearing will be set to consider whether the order for possession and sale will be granted. The order will not be made where a non-bankrupt partner or children reside in the property until one year after the date of the bankruptcy order. After this date, the order for possession is likely to be granted. Even at this stage, the trustee will give you an opportunity to leave the property voluntarily, handing over the keys. Failing this they will apply for a warrant for possession, which will mean enforcement agents will evict you for the property and change the locks.
Following this, the property will be placed on the open market and to reduce the burden on the trustee, may be marketed at a lower value to achieve a sale within 90 days. Upon the sale any funds due to the joint owner will be paid to them. However, this will be net of any costs of sale and costs orders granted by the court.
If you are subject to a bankruptcy petition or a bankruptcy order, and have significant equity in your property, the main thing to do is act quickly. In either circumstance you may be able to take action such as proposing an individual voluntary arrangement to counteract the petition or annul the bankruptcy order. In either circumstance, the sooner you act, the more options you will have. Our business rescue experts can take you through the next steps in order to protect your home.
IVAs, or individual voluntary arrangements, were introduced as an alternative to bankruptcy. As mentioned above, an IVA is a legally-binding contract between an individual and his or her creditors. An IVA is often regarded as the best option for individuals with assets. It provides the necessary breathing space to regain control over finances. Debts that can be dealt with via an IVA include personal loans, credit card debts and other unsecured loans.
As an individual voluntary arrangement is a formal procedure, a licensed insolvency practitioner will oversee the process. The IP will produce the IVA proposal, set out to repay debts over a reasonable period. The IP will then work to negotiate the agreement on your behalf, but you must disclose all financial details. If more than 75% of voting creditors accept the terms, the IVA is legally-binding on you and all of your creditors. You must then begin to make the repayments. It’s important to note that creditors cannot add interest or demand more when an IVA is granted.
The role of the insolvency practitioner will change throughout the IVA process. Initially, the insolvency practitioner will act as an advisor. They will look to establish whether an IVA is indeed the best option for your circumstances before you proceed. They will then assist in the preparation of your IVA proposals.
Once the IVA proposals have been prepared, the insolvency practitioner will prepare their own report to creditors. This will detail what investigations they have carried out to support your proposals, recommending whether or not the proposals should be accepted. At this stage, they are known as the nominee. The nominee will forward their report along with your proposals, and obtain a decision from creditors as to whether the proposal should be approved.
If the IVA proposal is approved, the nominee will become the supervisor. At this point, it is their role to ensure the terms of the IVA are met by all parties. They will also aim to balance the interests of you and your creditors.
While an IVA is considered more flexible than a bankruptcy petition, you will have to pay to set up the procedure. An IVA can only be initiated through an insolvency practitioner, and the IP will charge a fee for doing so. The method for payments will vary with different practitioners. Some may take fees from the monthly payments, and others may ask for costs prior to setting up the IVA. Whilst the advice stage will generally be free, the nominee and supervisor fees will be included in the IVA costs.
If you enter an IVA, you will be placed on the insolvency register. The information also contains your name, address, date of birth and occupation. The insolvency register - which also records bankruptcy orders and other voluntary arrangements in England and Wales - is open to the public. This could affect employees in the financial sector, so you must consider all options before entering into the procedure. However, your entry on the insolvency register will be removed three months after your final payment, once the IVA has finished.
We have touched on the typical length of an IVA, which is to say most IVA’s last for around five to seven years. The exact duration depends on your ability to pay back the monthly installments. For example, if you offer a lump sum to creditors, they can last less than five years. The insolvency practitioner will put forward the number of months in which the procedure will last, offering realistic monthly repayments. Most IVAs will require you to remortgage any property you own. However, if you are unable to do so, creditors will generally expect you to pay for at least an additional 12 months.
Not all individual voluntary arrangements can be granted, as there are certain criteria to meet. You must have sufficient surplus income to put forward a contribution to your creditors proportionate to the level of debt. Before you look into the procedure, we suggest you produce a budget on what you can repay. The insolvency practitioner will also work with you to ensure you are not paying more than you can afford. They will also suggest areas you may need to reduce your spending.
It’s important to consider the IVA pros and cons before initiating the procedure.
An IVA is a formal debt process, but is less extreme than a bankruptcy petition. Filing for bankruptcy is not to be taken lightly, as it removes all financial control and can leave a poor financial reputation. Similarly, bankruptcy petitions can seriously affect your professional status. Many industries are unable to hire those who have previously filed for bankruptcy. The social status regarding an IVA is also seen as less damaging than personal bankruptcy. However, it’s important to note that an insolvency practitioner can initiate bankruptcy proceedings if you fail to keep up repayments.
An IVA offers more flexibility than bankruptcy. It may be possible to keep certain possessions when proposing an IVA. You can also continue to use your bank account when entering an individual voluntary arrangement, whereas your account is likely to be closed when filing bankruptcy.
When you enter a formal debt solution, credit agencies are informed. A note will be made on your credit file and will remain there as long as the IVA lasts. Similarly, you will be placed on the IVA register. As lenders carry out due diligence tests, it’s likely that the IVA will affect your ability to gain credit. Even when the IVA is removed from your record, you may fail to obtain credit. However, there are many lenders specialise in helping those who have been in debt. You can improve your rating with the likes of a ‘credit builder’ card. The same will go for those who are looking to obtain a mortgage after an IVA. You will not be able to do so during the procedure, and may struggle after you have made the repayments.
Unlike bankruptcy, a director does not have to resign or lose their position when entering an IVA. However, some companies may include a provision in their contracts, stating an IVA is grounds for dismissal. Your IVA cannot stop you going on to become a director, unless the company states they do not hire those with an IVA on their record. This is highly unlikely, due to the number of individuals entering the process.
Ultimately, you must seek advice before bankruptcy becomes your only available option. Our licensed insolvency practitioners can work with you to ensure your proposal is realistic, and you can meet all installments, as well as provide the necessary IVA advice.
As mentioned above, we are discussing the CVA procedure and the practicalities for retail companies. Do they help preserve the brand? Or do they simply draw out the length of time before the retailer becomes another high street casualty, entering administration with no hope of finding a buyer?
There are many reasons cited by these large retailers for having to turn to formal insolvency procedures, including:
The impact of increased online sales can be seen in the chart below. It explores the comparison between the change in the value of retail sales against the previous year from online/postal order stores against the non-food retail stores.
While there has generally been growth in the value of sales in retail units over the past 2 years, the increases in the value of online and postal order sales has been strong and consistent - evidenced in the chart.
With online retailers often operating from a single enormous warehouse and office unit, store retailers have to manage a portfolio of large retail properties across the country. Often, this sees companies facing increasing leasing and business rate costs. At the same time, they must compete on pricing with the much cheaper online only retailers. This has culminated in the current situation retailers are finding themselves in, as seen in the number of CVAs.
Company voluntary arrangements make up the smallest number of formal insolvency procedures entered into by businesses. The chart below sets out the insolvency figures for 2017. CVA’s make up only 2% of total corporate insolvencies.
Generally speaking, it is rare for a company voluntary arrangement to be best advice for a company in financial difficulties. A CVA may be the best advice for a company in each of the following circumstances:
The latter option is rarely used, due to the significant increased cost. There is also the risk of further losses to creditors if the CVA fails, over actually going into liquidation. It will often only be used if there is to be a significant personal contribution from the director to deal with an overdrawn loan account or similar issues.
As a CVA requires 75% of voting creditors to approve the proposals, canvassing creditor opinion, where possible, before putting forward formal proposals is essential. If all faith has been lost with major creditors, they will often outright reject a CVA, leaving the company facing terminal insolvency. A CVA can also not be used as a “sticking plaster” to prolong the inevitable. The insolvency procedure should not be put forward if there has been no substantive change in the business.
If there is a serious risk of a winding up petition submitted at a later date, this can be highly detrimental for employees rights in future dealings with the Redundancy Payments Office:
Any entitlements arising after the date of the CVA would, therefore, not be paid by the redundancy payments office. If a pay cut has been taken and, only a couple of months later the company is wound up, they would be paid based on the the reduced level. Consequently, this can leave employees seriously out of pocket. Subsequently, the board may face complaint and reputational issues for not taking the correct action immediately.
Going back the the statistics in the first section of this article, there is no real evidence of a significant increase in growth for large store based retailers. This rules a CVA out on the grounds that the business is only dealing with problems from its historic debts. Subsequently, this leaves the situation that either the business has recently restructured, or will be restructuring using the CVA as a means to deal with this.
In reality, unless there is a material change in how retailers operate, they must become creative to compete with online only retailers:
It is worth remembering that once online retailers get to a certain size, they are not quite so focused on the customer experience. It's hard to find anyone who does not have a story about poor service from their delivery drivers. Hitting these niches, therefore, can allow in-store retailers to compete on the same platform as online only stores, as well as with their own unique customer service experiences. If a previously struggling high street retailer can take steps to increase the number of customers and sales value, whilst cutting down on costs, then a CVA may be a viable option.
Based on the above, there is a lot to be done before a high street retailer can viably propose a CVA. Essentially, they need to innovate and potentially reinvent the business, with limited funds and increased creditor pressure.
Looking first at the Toys R Us CVA, this failed as soon as the first VAT quarter fell due. The CVA was a last ditch attempt to rescue the business, without a serious attempt to change the nature of the business. Some cost savings were attempted, but there was no serious attempt to change the structure of the business. The same one it had been operating under for the last 30 years. Therefore, a CVA was not deemed appropriate in this instance, particularly evidenced by how quickly it failed. As such, the Toys R Us administration came about, and they should have entered company administration immediately.
Moving on to the New Look CVA, approved by creditors last month. The company is now bound to make payments for the next 3 years in order to settle its debts. New Look will be looking to close 10% of its UK stores, along with making 6% of its staff redundant in an attempt to reduce costs, at the least profitable stores. The company is also attempting to generate additional sales via e-commerce, realign its pricing in the increasingly competitive market, and narrow its range to more of a niche. These are all steps in the right direction. With these changes, there is the possibility of the CVA being appropriate, thus avoiding the same mistakes in the Toys R Us administration case. However, only time will tell.
Finally, looking at the prospect CVA for Carpetright, the board has suggested they intend to raise funds via investment. They will also close a number of unprofitable stores and re-brand the remaining stores to attempt to save the business, whilst proposing a CVA. Unfortunately, many will be unwilling to invest money in the failing company after announcing they are looking to propose a CVA. They appear to be a similar story to Toys R Us, operating on the same model and seeking to simply polish the failing company. They do sight the reasons for failure as the previous management opening an excessive number of stores. However, in these circumstances, company administration may be more appropriate, with the “investors” conducting a buyout through a pre-packaged deal.
Out of the 3 recent high profile retail CVA announcements, only one set of circumstances actually lends itself to a CVA as opposed to company administration. It can be appealing to keep the company going for as long as possible, but is it a breach of fiduciary duties to propose a CVA, with no real chance of successful implementation. This is particularly pertinent when the arrangement fails on the due date of the first VAT quarter. If you are considering a CVA for your retail business, you can contact our business rescue experts for some honest and straightforward advice as to the best option for your circumstances.
As mentioned above, a CVA is a business turnaround tool rather than a terminal insolvency procedure. A company voluntary arrangement is an insolvency procedure providing a contractual arrangement between your business and creditors to pay back what you can afford, based on your business cash flow. However, like all insolvency procedures, there are benefits and consequences. Our guide to the company voluntary arrangement will take you through the process. You can read more information on the timeline of the procedure here.
While liquidation and administration remove a company director’s powers, you are still entitled to keep control of your company with the CVA procedure. Liquidators and administrators are assigned to recoup as much as possible for creditors, removing your position of power and selling company assets. A CVA allows you to control the business recovery plan and carry out the company voluntary arrangement obligations. You will still have to comply with the terms of the CVA proposal, but you continue to oversee the day-to-day running of the company.
Creditor pressure is one of the most significant signs of financial difficulty, but entering a CVA protects your company from said creditor pressure. A licensed insolvency practitioner will assist your company with the CVA proposal and once the CVA is approved, creditors bound by the proposal cannot take further legal action. For companies that have a viable chance for recovery, this could post the most significant opportunity, as long as you comply with the CVA proposal. Your company cannot be wound up during once the CVA is in place unless you incur further credit or fail to comply with the terms. However, if a winding up petition has been submitted, a CVA could be a better alternative to liquidation for the creditors.
It will often be the case that if your company enters liquidation there will be insufficient assets to repay any monies to creditors. However, a CVA, when compared to liquidation offers a better return to the creditors. While they still may not receive all monies owed, they can recover more than in winding up. It is in their best interests for your company to succeed and the CVA process can even improve your business cash flow - thus meaning you can recover more for the creditors in the future.
Speaking of liquidation, the consequences for your company are severe. A company voluntary arrangement allows your creditors to receive payment in installments, and keeps you in control. Liquidation will almost certainly result in a full loss of control as well as your company being completely closed down.
The CVA procedure may result in difficulties for the company in obtaining credit, but it’s far less damaging for your company reputation than liquidation. If your company were to enter administration, a notice will be placed in The Gazette alerting all interested parties to the insolvency. In doing so, your customers may see this and lose faith in your company, causing further financial problems. However, a CVA is only published at companies house and to creditors, giving your company the time to recover and make the necessary restructuring changes.
While the advantages of a company voluntary arrangement outweigh various other insolvency procedures, there are disadvantages to consider.
Accessing credit from banks and suppliers will become extremely difficult to do, which may have an adverse effect on your ability to trade moving forward with suppliers requiring payment on cash terms. However, this is the trade off against not being able to trade at all in the instance of your company being wound up. Unfortunately if some suppliers are included in the CVA, they may refuse to work with you moving forward and you will need to find an alternative. This can be a very difficult situation where specialised goods or services are provided.
Signing up to a CVA is a serious financial commitment as they usually last for 5 years. Failure will often result in the Supervisor of the CVA being forced to wind up the company either with your cooperation or through the courts by way of a winding up petition putting you back to square one. For the CVA to be viable there must be a material change in the trade of the business and you must be able to demonstrate it is the burden of historic debts holding it back, not that it is not currently turning a profit. If the latter is the case it may be more prudent to consider creditors voluntary liquidation.
In the corporate insolvency market, CVAs account for only around 2.5% of all insolvencies. Liquidation and administration are more common and a company voluntary arrangement may not be viable. A licensed insolvency practitioner will check to see if it is an option and work on a proposal with you. The creditors would then vote on the proposal and 75%, or over, must consent for the CVA to be accepted. For more information, we have outlined what makes a successful CVA.
Our business rescue experts can provide advice and aid in obtaining a CVA. You can get in touch with our insolvency practitioners via the contact form.
If you've been sent a HMRC self-assessment form, or received notification from HMRC since April 2015 that you need to fill one in then yes, you do.
According to the HMRC’s website, you need to file a tax return if:
If your tax is deducted by your employer, you usually don't need to submit a form unless you get additional income from a second job or freelance work. If HMRC has asked you to complete a self assessment tax return but you don't think you need to, get in contact ASAP. If you don’t and you simply don't send one in, you'll have to pay a penalty.
If you're late making your payment on account or your tax bill you'll be charged 5% interest. This is on top of the minimum £100 fine for missing the deadline for filing your tax return. From there, penalties can start to spiral. You can find more details of HMRC's late payment penalties here or use HMRC's penalty calculator to estimate any costs to you here.
You can appeal against HMRC's fines, if you have a "reasonable excuse". HMRC recently published a list of some of the worst excuses they have been provided which, it’s hard to believe, actually included: ‘The dog ate my tax return’, as well as, ‘I got the deadline wrong’ and, ‘My husband ran off with my accountant’. However, examples of a reasonable excuse that HMRC gives include:
If you are unable to pay the tax owing, there are a number of options available that you should consider. Initially, if you feel the amount of tax you are due to pay is incorrect, there are a couple of HMRC related processes to check:
If all of the above are excluded as an option then it is time to consider your options in relation to your financial circumstances moving forward.
If the amounts due to HMRC are your only significant liability and you DON'T have a proven track record of not paying HMRC, you may be able to apply for a time to pay arrangement. This can give you a few extra months to make the payments and can encourage HMRC to waive a number of penalties.
Follow the link to find more information in relation to time to pay arrangements, or for more tailored advice contact one of our business rescue experts directly.
If being unable to pay the self assessment on time is only the tip of the iceberg and you have bigger debt problems with more creditors than just HMRC, now is a good time to seek further information in relation to formal insolvency options. For example, for sole traders, a sole trader Individual Voluntary Arrangement might be a suitable option worth considering. If you would like to talk it through with one of our business rescue experts in the first instance, get in touch.
Above all, whatever your situation, keep these key points in mind:
As well as the financial outcome HMRC will consider your other actions including compliance and engagement when considering compromise agreements. Therefore, our advice is simple: keep HMRC up to date, ASAP, and it will benefit you in the long term. Even if you think you might have a query, don't leave things until the last minute. Recent figures showed that the HMRC contact centre telephone queue time averages around 35 minutes, and the later you leave it, the busier the phone line gets.