Most businesses would like the opportunity to write off bad debts.  In the current poor economic situation being able to write off debts may allow a business to be saved.

In certain situations it is possible to write off debts using a voluntary arrangement.  A Voluntary Arrangement is a process under the Insolvency Act 1986 which allows a Limited Company, an individual, a partnership or an LLP to write off debts or at least some of their debts so long as their creditors agree and certain specific criteria are met. 

For a limited company this will be dealt with via a Company Voluntary Arrangement.  The company would need to be Insolvent under the definition of the Insolvency Act 1986, but if it has a viable business if only certain debts could be written off, a Company Voluntary Arrangement may be practical.  For example a company may have suffered a very big bad debt with a former customer but the core business is sound and profitable.  Any such company should take advice from an Insolvency Practitioner.  They may then be in a position to put together a proposal for their creditors which will be clearly written out in a set format.  The proposal may say something like all future debts will be paid in full, all past debts will be put on one side and for the next three years the company will pay £x,000 to a ‘Supervisor’ who would then split the total money between all the debts that existed as at the date of the Creditors’ Meeting and they would receive say 40p or 60p in the £.  The balance of their debt would then be written off and the company would get a new beginning.  The Supervisor ought to be an Insolvency Practitioner.

Debts can be written off for individuals also and for this one would use a Individual Voluntary Arrangement.  But the individual would have to include all his / her assets in the Individual Voluntary Arrangement, not just the business assets.  This would therefore frequently involve the business persons share in their home, assuming they own it.  Again the advice of an Insolvency Practitioner can make these schemes work but they may involve the individual selling their home, or obtaining a re-mortgage on it which would certainly be worthwhile if it will allow them to write off debts.  The process of putting a proposal to the creditors for them to vote on and receiving contributions will not be dissimilar to a Company Voluntary Arrangement.  An alternative proposal can be put forward where a third party could offer a lump sum to the creditors which would mean they would receive a lot more immediately if they accepted the Voluntary Arrangement than if they forced the businessman in to Bankruptcy.  They would accept a percentage of their debt and the balance of their debt would be written off.

Where a trading debt is written off and has been allowed for tax purposes in the past, the debt write off may attract a tax charge in the future.  There are Voluntary Arrangement schemes for partnerships and LLPs similar to the above.

Article written by Anthony Harris FCCA
Licensed Insolvency Practitioner (aharris@critchleys.co.uk)