Following our previous article about farms facing insolvency as a limited company, we will now discuss the implications of insolvency on a sole trader or partnership.
Farmers running their business as a sole trader could face personal bankruptcy in the event the business faces financial difficulty.
Bankruptcy is an insolvency process where an individual is unable to meet their debts. On the making of the Bankruptcy Order, the Bankrupt's assets vest in their Trustee in Bankruptcy and are to be realised for the interests of creditors. The Bankrupt is automatically discharged after one year, but this does not stop the Trustee from dealing with the assets of the bankruptcy.
Upon the making of a Bankruptcy Order, the Bankrupt's interest in their home will vest in the Trustee under Section 306 Insolvency Act 1986. The Trustee is then under an obligation to realise his interest in the Property.
If the Property is the Bankrupt's family home / principle place of residence, the Trustee has three years to deal with their interest. This is called "use it or lose it", and if a Trustee fails to realise their interest within the three years, it automatically revests in the Bankrupt. For other assets e.g. second homes, there is no time frame in which the Trustee must realise their interest until the costs and expenses of the Bankruptcy are paid.
If the farmhouse is the principal place of residence, "use it or lose it" would apply. Whilst in most situations one would imagine the farmhouse and surrounding farmland would be sold in one transaction, it could be that there is an unusual situation of the farmhouse having to be sold within the three year period, but the surrounding farmland not needing to be dealt with for some time.
Where a farm is traded as a partnership, the partnership could be faced with a Partnership Winding Up Petition. As the partners' liability is not limited, there is also a risk of bankruptcy to the individual partners as they will be personally liable for the debts of the business.
For further information about partnerships, and the importance of a Partnership Agreement, see our article from February.
Insolvency can be a very expensive process, especially in a sector where businesses and individuals are often "asset rich but cash poor". Whilst any surplus will be returned, the costs and expenses of administering the bankruptcy or winding up can be very high, and significantly reduce the surplus.