Sole Trader Insolvency

If a sole trader is consistently unable to pay their debts on time they could be heading for sole trader insolvency. This means that any trader struggling with cash flow problems is potentially insolvent.

Just because a business is profitable does not make it solvent. If customers take a long time to pay or if there is substantial debt for working capital, such as an overdraft, there is a higher risk of running out of cash.

There are a large number of indicators of impending financial problems. These include always paying creditors late, including HM Revenue and Customs. The balance sheet might indicate that the business has more liabilities than assets. It’s also a bad sign if there is a continual search for new sources of credit.

As with other commercial organisations, sole traders have a responsibility to their creditors. If they are insolvent, or in danger of going that way, action needs to be taken sooner rather than later.

Options for Sole Trader Insolvency

If a sole trader becomes insolvent there are a number of different routes that can be taken.

One possibility is that the trader is declared a bankrupt. This often occurs when a creditor pursues them through the courts for a debt of over £750. Having obtained a County Court Judgement for a debt, they can proceed with a Statutory Demand. If this remains unpaid after 21 days a petition for bankruptcy can be lodged.

Once declared bankrupt, control of the trader’s assets is given to an insolvency practitioner, who disposes of them in order to settle the demands of creditors. Bankruptcy law is complex and this is usually a last resort.

Another option is an Individual Voluntary Agreement. This involves drawing up a schedule of repayments and must be agreed by 75% of creditors (by value) in a meeting. The business can continue to trade.

A licensed insolvency practitioner should be involved in creating the proposal for the agreement, which is presented to creditors. Failure to comply with the agreed terms can still lead to a petition for bankruptcy being lodged.

If the business is viable and creditors are willing, it may be possible to simply trade out of the situation and return to solvency. This would probably involve an informal arrangement with creditors, who agree to be paid over a period of time but there is no legal involvement. Advice of an insolvency practitioner may still be sought and this may in itself give creditors the confidence they need.

However, trading out or seeking alternative sources of finance do not prevent the situation from deteriorating if the cash flow position does not improve and debts continue to be unpaid.

The Value of Good Advice

Insolvency practitioners and business turnaround specialists have substantial experience with a range of commercial operations, including sole traders.

They understand the choices available, the risks associated with different options, and the legal pitfalls that can trap the unwary. Their knowledge is invaluable to businesses that are in trouble, and it’s always wise to take advice sooner rather than later.

Often they can help to structure informal agreements with creditors. By acting as a neutral third-party they offer credibility and integrity, which can sometimes persuade creditors not to resort to legal action. At the end of the day creditors want to be paid and if they have the confidence this will happen they will often be willing to accept formal approach. They can still resort to law if they have to.

At Touch Financial we are experienced at providing cash flow solutions to a wide range of organisations, and we’ve helped thousands of business owners. We bring an enlightened partnership approach to working with our customers, because we know that every situation is different.

If you need to find out more about insolvency issues for sole traders, why not make contact with us? We’ll offer you a no-obligation consultation with one of our experts, listening to your issues and showing you how Touch can help your business.

Also in this section

Every month Touch Financial help businesses improve their cash flow with invoice finance. Request a quote to find out how much extra cash you could raise.

Get a quote >