Ceasing an insolvent sole trade can be more difficult that ceasing a business conducted through a limited company. Philip Maher Director, Financial Advisory with Mazars and Chairman to the ACCA Ireland Committee looks at some of the issues.

Sole Trader Insolvency

A sole trader business is not regarded as a separate legal entity unlike a limited company. When a company becomes insolvent, the directors receive protection from personal liability via what is known as the ‘veil of incorporation.’ For an insolvent sole trader, it becomes a personal insolvency issue whereby the individual is wholly responsible for the debts of the business, and therefore at risk of personal insolvency or bankruptcy if creditors are not repaid.

MABS

MABS is a free and confidential service for people having problems with money management and debt. A MABS money advisor can contact creditors for the individual with offers of payment that the individual can afford. They can help the person to decide the best and most effective way to make payments and clear debt. Where the individual is at risk of losing their home, MABS have a panel of solicitors, personal insolvency practitioners and accountants in practice who will provide advice or other assistance to the individual and MABS covers the cost of this advice. The scheme is called Abhaile.

Insolvency Service of Ireland (ISI)  

There are four options a sole trader faces in winding up their insolvent businesses. These are detailed under the Personal Insolvency Act 2012:

• Debt Relief Notice (DRN);
• Debt Settlement Arrangement (DSA);
• Personal Insolvency Arrangement (PIA); and
• Bankruptcy.

A DRN is an insolvency solution for people who have a low income, few assets and debts of less than €35,000. It is a formal agreement that allows for the write off of debts up to €35,000 where it is unlikely that a person will be in a position to repay them and it is unlikely their financial situation will improve in the next 3 years. Debts such as personal loans, credit card loans, store cards, credit union loans and overdrafts could be included in a DRN.

A DSA is an insolvency solution for people who have unsecured debts only - credit cards, loans, overdrafts etc. Unsecured debts are debts where the unsecured creditor would not be entitled to seize specific assets if the debtor fails to make repayments because that creditor does not hold security over those assets.

A PIA is an insolvency solution for people with unsecured and secured debt that they cannot repay. A Personal Insolvency Practitioner is a required intermediary and it is subject to a cap of €3million, unless creditors consent to a higher level. A PIA is a legally binding agreement with creditors; this means it cannot be changed without the agreement of both parties.

The final option for a sole trader faced with insolvency is to file for Bankruptcy. In order to be eligible to file for bankruptcy your debts must exceed your assets by more than €20,000. All other alternative arrangements must have been exhausted such as the aforementioned DSA and PIA. The individual must co-operate fully with the Official Assignee and his/her staff in all matters with relation to the bankruptcy. As soon as an individual’s bankruptcy starts, they are free of debt. The Official Assignee now owns all assets previously owned by the individual and administers the estate. Creditors can no longer seek repayment directly from the bankrupt and must deal with the Official Assignee directly.

Revenue

There is a certain formal process which must be followed when there is an inability to pay the Revenue Commissioners what they are owed. An offer letter must be sent with an inability to pay form along with a completed statement of affairs document. Depending on what assets the individual has and whether there are debts attaching to same, revenue may or may not accept the proposed offer. See inability to pay Revenue manual.

Professional Advice

Seeking professional insolvency help at an early stage is crucial as soon as you believe there is a problem. If the business enters insolvency, your business and personal debts will be combined, and you may have to enter a form of personal insolvency.

Philip Maher

Director - Financial Advisory

pmaher@mazars.ie