From a business point of view Sole Traders are in a vulnerable position with regard to their creditors. Not being a ‘limited liability’ company exposes them to debts that have unlimited liabilities. Personal assets are at risk when things go wrong, loans can’t be repaid and debts mount up.
Liabilities are unlimited and personal assets are set against them; however, the 1986 insolvency act recognises that a sole trader is seen as an individual in his or her own right and can take advantage of the legislation in the 2002 Enterprise Act introduced on 1 April 2004.
This agreement is normally accepted by creditors if a superior return is greater than would be available in a bankruptcy. The object is to reach a solution that benefits both parties by continuing to trade through the problem.
A Statement of Affairs is produced and circulated to all creditors who will have an opportunity to vote for or against the proposal. This arrangement is an ideal opportunity for the Sole Trader to be given time to turn things around.
Once an agreement has been reached and confirmed at a creditors meeting the County Court will endorse the agreement to ensure security for all. Affordable monthly payments are made to the Insolvency Practitioner who is now referred to as the Supervisor.
Unless a 100% dividend is on offer the duration of the agreement will be for 5 years. All debts within the agreement that remain unpaid at the end of 5 years are written off.
Qualifying conditions have to be met as individual circumstances differ.