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Bankruptcy and No Fault Bankruptcy – Advice for Sole Traders

20th January, 2021
Categories:
Robert Moore

Written ByRobert Moore

Marketing Manager


+447584583884

Rob has over a decade of experience in web and general marketing. He has extensive knowledge of the Insolvency sector and has helped many worried directors with their questions.

Rob is now working with the Board at KSA Group Ltd to develop strategic marketing programmes to support the business plan and drive more company rescues.

Robert Moore
worried director
  • Bankruptcy: a plain English guide to the bankruptcy option
  • No Fault Bankruptcy
  • Bankruptcy: the Process
  • A Debtor’s Petition
  • A Creditors Petition
  • A Supervisor’s Petition
  • The Hearing
  • The Estate
  • Excluded creditors
  • The Matrimonial Home
  • Changes to the Rules on Matrimonial Homes
  • Professional Qualifications
  • Income Payment Orders
  • The Rules
  • Discharge
  • Summary

Bankruptcy: a plain English guide to the bankruptcy option

Only individuals can enter bankruptcy, it is not an option for limited liability companies, it is a much misused word that tends to be used by people, commentators and journalists to describe business failure.  A business itself doesn’t become bankrupt but rather it becomes insolvent.

For individuals this is the last resort. However, the UK Government relaxed the rules of bankruptcy for individuals in 2003.

The following guide to bankruptcy cannot be comprehensive given that it is a general discussion of the process, application for bankruptcy and exit from it. This mechanism can be very complex depending on your individual circumstances. It is important that you take professional advice before entering bankruptcy.

Other alternatives are available and it is vital that you consider all of those options by reading about them on this online guide and if necessary talking to us by e-mail or through our telephone support line.

If bankruptcy is your preferred option please check that you have gone through our suggested decision-making process before reading on:

  1. You have established that you are insolvent.
  2. You have considered what your personal and business objectives are.
  3. You have studied all available options.
  4. You have decided to enter bankruptcy because the business is not viable and your assets are outweighed by your liabilities and you’re insolvent on the cashflow test.

No Fault Bankruptcy

Under the Enterprise Act 2002 the UK Government significantly relaxed the rules regarding bankruptcy. From April 2004 the sole trader who has a failed business (where there are no issues of fraud, misfeasance, recklessness etc) will be able to file for bankruptcy (see process below) and be discharged from that bankruptcy within say 12 months. Previously a bankrupt was not discharged until 3 years had elapsed.

Provided the bankrupt conforms to the rules and is compliant with the Trustee (see below) the bankruptcy can be a quick and powerful process.

It is possible nowadays to obtain mortgages and credit for discharged bankrupts, so this process may be better for your personal future than trying to plough on with an unviable business through trading out or Individual Voluntary Arrangement.

Bankruptcy: the Process

There are three different ways that bankruptcy can be initiated under the current legislation.

  1. A Debtors petition to the court.
  2. A Creditors petition to the court.
  3. The supervisor of an individual voluntary arrangement petitions the court.

If you have considered all the above please ensure that you gather together all available information with regard to your personal and business financial circumstances. Put together a file of information all in one place to include: all legal actions against you, copies of any accounting information, copies of any financial plans and business plans, copies of business and personal creditors statements and a list of all of your assets.

Also a good bit of advice, always make notes (or minutes) of meetings, telephone conversations and discussions with creditors. Date them and make sure that you save or file them safely. This will act as a good record if things become difficult in the next few weeks and months.

It is also important to draw up a very basic statement of affairs which compares your assets against your liabilities.

We would thoroughly recommend obtaining professional advice before deciding finally upon bankruptcy. For assistance please do call us on 08009700539 or e-mail us. Alternatively, contact any local insolvency practitioner; you can find one in the Yellow Pages.

Only cease trading when it becomes impossible to continue through cashflow pressure or when you have taken professional advice. It may be that the situation that has brought this to a head can be dealt with through an IVA or an informal deal with creditors and it is important to keep all avenues open until profession advice has been taken.

A Debtor’s Petition

Find the address of your local County Court in the local telephone directory and visit the Court office to pick up a debtors petition pack. The Court may levy a fee for this but you will find that the court officials are very helpful and can often help you with the completion of the form. The form is necessarily complex and copious and if you require help please contact the court official that gave you the document.

Once you’ve completed the form and supplied all information that it requires, take the completed file back to the court along with filing fee. This is known as a debtors petition – basically you’re asking the court to hold a hearing at which you will be made bankrupt. This is not as frightening or as daunting as it may sound and you’ll find the Court is sympathetic to your situation.

If bankruptcy is the only option, it is, in our opinion, better for the debtor to initiate this process. This has the effect of crystallising the position and removing the pressure. This also mitigates the cost for creditors of doing it themselves.

A Creditors Petition

It is possible for a creditor to issue a petition for bankruptcy if the debt that they are seeking to recover has been proven. Often this requires a County Court Judgment or a Statutory Demand to have been served upon the debtor.

The creditor may have also tried to recover the funds due to him or her via a warrant, a bailiff or a Sheriff.

Typically this type of action can be initiated by the Inland Revenue / VAT where there are outstanding debts – if this is the case, please do not hesitate to contact us because there are other ways to deal with the situation other than through bankruptcy; unless of course the business is not viable.

Alternatively if the debtors petition is too expensive or you simply cannot afford to go through that process yourself, it is possible to wait for a creditors petition. We wouldn’t recommend this because it demonstrates to the court and to the creditors that you have been burying your head in the sand. This may not, of course, be true but this is the perception. By allowing a creditor to go through the petition process the court will grant the hearing and you may be made bankrupt by the court in your absence.

A Supervisor’s Petition

If you’re in an IVA (individual voluntary arrangement) which is failing or under severe pressure please do not hesitate contact us. We may be able to assist by restructuring the IVA or indeed replacing the IVA, you will have of course have to demonstrate viability and a reason why the IVA has not been adhered to.

The supervisor will normally issue a petition to bankrupt you when the IVA has failed. This may be because you have failed to keep up with the regular payments prescribed by the IVA or you have failed to supply information or comply with the general terms of the IVA.

Prior to commencing this action the supervisor will generally have to issue an abort certificate demonstrating to you and the creditors that the IVA has failed. Of course prior to this he or she is likely to have communicated with you, in writing, several times asking for the voluntary arrangement to be adhered to.

If you have ignored all these issues and still believe that the business is viable or that you are still a lot better off in an IVA; once again please do not hesitate contact us. Be prepared to explain to us why you have ignored all of this communication!

The Hearing

Once the petition (from whichever source) is received by the court a hearing date will be set by, the Court officials. This can be anywhere from one day to two weeks dependent upon available Court time.

At the hearing the court will consider the statement of affairs and the documents produced by you or the creditors and grant a bankruptcy order.

Typically the Official Receiver is appointed as trustee in bankruptcy. But if there are significant assets an insolvency practitioner (IP) may be appointed trustee in bankruptcy at the by the Official Receiver or by the court directly.

The Official Receiver will then interview the debtor to check through his/her documents and to establish his or her income and financial position. In the event that there are significant assets, as described above, an official receiver may appoint a local insolvency practitioner as a trustee in bankruptcy. The IP will seek to recover those assets over a period of time on behalf of the creditors.

The Estate

All assets belonging to the debtor and like him are included in the estate. Some of those assets however may, of course, be charged to or have partial ownership by another individual or individuals.

Where exclusive ownership cannot be established, you will have guessed or estimated the amount of the asset that you believe to belong to you, in your statement of affairs.

Typically items such as motor vehicles (under hire-purchase agreements), mortgage property such as matrimonial homes and assets under a partnership agreement may only be partially available to the trustee on behalf of the creditors.

Nowadays, the undischarged bankrupt is allowed to maintain tools of the trade. This may include a modest motor vehicle and will definitely include hand tools etc. Large tools such as lathes and machinery will usually not fall into this description unless they have little re-sale value. And, where furniture and other items belonging to the bankrupt are under disputed ownership, it is unlikely that the trustee will seek to recover them. For example a TV bought jointly by husband and wife.

Excluded creditors

Bankruptcy does not however dismiss all debts. Items such as CSA (Child Support Agency) payments, maintenance to spouse, government fines, mortgages or items under hire-purchase arrangements are excluded.

The Government has also moved to close a loophole that allowed Student Loans to be written off in bankruptcy.

The Matrimonial Home

Typically in bankruptcy 50 per cent of the unencumbered equity in any matrimonial home is available to the trustee in bankruptcy for the creditors. But the equity in many houses is modest and the cost of pursuing this equity often outweighs the benefit of collection.

It may be possible to maintain, with the permission of the trustee, the matrimonial home. This, of course, is largely dependent on whether the mortgage company is prepared to continue to receive mortgage payments and whether you are able to meet those payments.

For example your spouse may have sufficient income to meet the mortgage payments and if there is not a significant chunk of equity available to your estate, as described above, it may be advantageous to maintain the property through the bankruptcy period.

Changes to the Rules on Matrimonial Homes

This is a very complex area but one that all people planning bankruptcy should read. Where the bankrupt has equity in his/her matrimonial home (and another person is entitled to 50% of the equity), the Trustee can register a Caution at the Land Registry. This prevents the home from being sold without the Trustees permission.

Where the bankrupt has gained new equity this equity can be available to the Trustee for the creditors even YEARS AFTER THE BANKRUPT IS DISCHARGED. This can be very distressing and is an area that most insolvency professionals, bankrupts and dischargees would like to see tackled.

In the new regime for bankruptcy we understand that the Trustee of a bankrupt will still be able to register a caution, once he/she has discharged the bankrupt he/she will only have 12 months to use it or lose it. At the time of publishing this we do not know whether this has been finalised or not. But clearly this is an area that should concern all home owners facing bankruptcy

Professional Qualifications

It is not possible for an undischarged bankrupt to be a Justice of the Peace or a Member of Parliament. Other professional qualifications can also be at risk if you enter bankruptcy such as being a solicitor, a chartered accountant, certified accountant or registered Auditor. Nor may you be member of a local authority. If in doubt you should take advice from your professional organisation whether bankruptcy will affect your ability to continue under your professional qualifications.

Income Payment Orders

Should you obtain a new job with a higher salary than previously, or a higher disposable income than indicated to the court and the trustee, it is possible for the trustee to seek to recover some of this excess remuneration through an IPO (income payments order).

For example if you stated that your net disposable income was £200 per month and subsequently obtained a position that gave you £1,200 per month disposable income, then it is likely that the trustee will seek to recover a large percentage of this difference.

If you fail to agree he can apply to the court for this order to be ratified by a judge. To fail to maintain such a payment may be an offence. A trustee may seek to recover these amounts directly. If you fail to comply he/she may seek to sell property or other assets that he holds on the creditors behalf. Of course there has also a risk of incurring the wrath of the court and a prison sentence is possible.

The Rules

Once made bankrupt you may not be, without the permission of the court, a director of a limited company in the United Kingdom. To do so is a criminal offence. You may not act as a manager of a limited company in the United Kingdom or in act in the formation of a company in the United Kingdom during the course of your bankruptcy.

During bankruptcy you may not obtain credit of greater than 250 without disclosing that you are an undischarged bankrupt. To do so is a criminal offence.

Whilst you may continue to trade as a sole trader or a severe restrictions placed upon the bankrupt. For example you must not trade under a new name or different name to that which you traded under prior to being made bankrupt. If you trade in a different name this is a criminal offence.

Discharge

Once the bankruptcy term is complete and you have conformed to the wishes of the trustee in bankruptcy; you are discharged from bankruptcy.

Although this means that most debts are written off some are not such as Government fines and child-support etc. However, debts to the Inland Revenue, VAT and other trade creditors in the period up to your bankruptcy are written off.

It may be possible to start rebuilding your credit rating and to obtain a position of director or partner in a partnership for example. After say 12 months your personal emotional state, health and enthusiasm may have returned to normal. So it may be a new start.

Summary

Once again we would reiterate that the above can only be a general guide to bankruptcy. There are many rules and regulations under the Insolvency Act appertaining bankruptcy and with a huge variety of causes of bankruptcy and different structures of bankrupt estates, it is impossible to answer all questions in a computer-aided guide.

If you have any doubts as to the current situation you face please revisit the how to use this site page and followed the instructions there.

Where can I find a bankruptcy Flowchart

We have produced a flowchart, which graphically illustrates the process of becoming bankrupt. Print this flowchart off for future reference!

Finally, we would like to point out that bankruptcy is often just what is required to crystallise and clear up a very difficult situation. Many people have emerged from bankruptcy and gone on to be much happier, wealthier and possibly wiser!

In the United Kingdom between 10-15,000 people each year enter into bankruptcy. In recessionary times this can rise as high as 25-30,000 people, with the new rules this could rise to over 40,000 per annum. Therefore you are not alone.

However, bankruptcy should only be used where all other avenues have been considered, this website studied and professional advice has been taken.

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What Is A Winding Up Petition By HMRC or Other Creditor

A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent.

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What Is A Winding Up Petition By HMRC or Other Creditor
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Notice of Intention To Appoint Administrators

A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.

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Notice of Intention To Appoint Administrators
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What Does Going Into Administration Mean?

Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners.  The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)Company rescue as a going concern – this is usually a  company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation.  This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required.  Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk.  So communication with the secured lender is essential.  

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What Does Going Into Administration Mean?

What is Receivership?

in What is …? What is receivership?

Understanding Receivership: Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control.  When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.

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What is Receivership?

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