Insolvency Glossary of Terms
A process designed to rescue a company, partnership or LLP and/or improve the return to creditors (secured or unsecured), often via a sale of the company’s business and assets.
The process can be commenced either
- out of court (i.e. without a court hearing) via the filing of a Notice of Intention to Appoint or Notice of Appointment, by:
- A board of directors
- Secured lender with a floating charge, or
- company shareholders
- or, in Court (i.e. with a court hearing) by the application of a creditor owed more than £750, board of directors or company shareholders.
A traditional Partnership or Limited Liability Partnership may also enter into Administration.
One of the key benefits of Administration is the bar on legal and/or recovery processes being commenced or continued (known as the statutory moratorium) without the consent of the Administrator or the court.
An Administration Order is an order granted by the Court placing the Company into Administration. An Administration Order is only made when the an application is made to court for Administration.
A Licensed Insolvency Practitioner who holds the position of Administrator during the period of Administration. The Administrator will be a person and cannot be a firm. The identity of the Administrator will be chosen by the person seeking to place the company/partnership/LLP into Administration.
The Administrator must act in the best interests of all creditors and not just one or more secured creditor(s) unlike an Administrative Receiver.
A Licensed Insolvency Practitioner who holds the position of Administrative Receiver during the period of Administrative Receivership.
The Administrative Receiver will be appointed by a secured lender to recover monies owed only to the lender.
Unlike an Administrator the Administrator Receiver’s duty of care is only towards the lender appointing him/her.
An Insolvency process where a Secured Lender appoints an Administrative Receiver under the terms of its charge to realise sufficient funds (or as much as possible) to repay the lender’s indebtedness. Since 15 September 2003 Administrative Receiverships have become uncommon after Insolvency legislation changed.
To appoint an Administrative Receiver the Secured Lender must hold a charge over the whole or substantially the whole of a company’s assets. Without this the lender cannot appoint an Administrative Receiver.
This is a specialist remedy, available to a secured creditor, to take control of the assets of a farmer.
When a Bankruptcy Order ought not to have been made or a Bankrupt can pay their debts (together with costs of the Bankruptcy and interest) in full, it is possible to apply to the court for Annulment meaning that the Bankruptcy Order is in effect withdrawn and was never made.
This is a specific definition within the Insolvency Act 1986 to classify those ‘associated’ with the party subject to the relevant Insolvency Proceeding. It has relevance to certain remedies available to Licensed Insolvency Practitioners.
Associates of individuals include family members, relatives, partners and their relatives, employees, employers, trustees in certain trust relationships, and companies that the individual controls. Associates of companies also include shareholders, directors and other companies under common control.
This was the term for someone whose job it is to collect a debt on behalf of a creditor. Since 21 April 2014 they have been called Enforcement Agents.
When a person (known as a Debtor) is unable to pay their debts then a Bankruptcy Order is made following the presentation of a Bankruptcy Petition. This starts the process of Bankruptcy.
Once a person is Bankrupt either the Official Receiver or an Insolvency Practitioner will be appointed as Trustee in Bankruptcy to Realise the individual’s assets to attempt to make payment to the Debtor’s creditors.
Bankruptcy lasts 12 months, unless the Bankrupt is Discharged earlier or the Discharge is suspended as a result of the poor conduct of the Bankrupt. After Discharge the Trustee in Bankruptcy will continue to Realise the assets of the individual until they are all dealt with.
A person who against whom a Bankruptcy Order has been made.
An order made by the court that confirms and commences the period of a Debtor’s Bankruptcy.
A request (known as a Petition) made to the court when a Debtor has failed to or cannot pay their debts and someone wishes for a Bankruptcy Order to be made.
Bankruptcy restrictions order or undertaking
When a Bankrupt has been dishonest or in some other way to blame for their Bankruptcy they may have a court order made against them or give an undertaking which will mean that bankruptcy restrictions continue to apply after Discharge for a period of between two to fifteen years.
This is an order of the court providing a (previously) unsecured creditor with a charge over property to secure their debt.
To obtain a charging order a creditor must go to court, obtain a CCJ, and make two further court applications to obtain firstly an Interim Charging Order followed by a Final Charging Order. Once the Final Charging Order is granted the creditor holds a secured charge over the property. The Charging Order will need to be paid off on a subsequent sale of the property and provides the creditor with the opportunity to ask the court for permission to sell the property to obtain payment for their debt.
This is an agreement between a Debtor and his/her/its Creditors. The compounding Creditors agree with the Debtor, and between themselves, to accept payment of less than the amount due to them, in full satisfaction of their claim.
When a company is unable to pay its debts then a Winding Up Order is made following the presentation of a Winding Up Petition. This starts the process of Winding Up.
Once a company is wound up it is in Compulsory Liquidation and either the Official Receiver or an Insolvency Practitioner will be appointed as Liquidator to Realise the company’s assets to attempt to make payment to the company’s creditors.
It is most commonly used by a creditor who is owed more than £750, but it can also be used by the secretary of state on public interest grounds or by shareholders who think it is just and equitable to wind up their company.
Unlike a Voluntary Liquidation, the directors and shareholders have no say in the initial choice of Liquidator.
Company Directors’ Disqualification Act 1986
This sets out how and when a person may be disqualified from acting as a company director. It provides that a director can be disqualified for between 2 and 15 years either as a result of providing an undertaking not to act as a director or by formally being disqualification order from the court.
Company Voluntary Arrangement (CVA)
In simple terms this is a contract between a company and its creditors to repay some or all of its debt over a period of time. It is legally binding on all concerned and much stricter than a simple contract with defined consequences if it is not adhered to.
A CVA is a very powerful Business Recovery tool and can literally turn a company from unprofitable to profitable overnight.
Unfortunately most CVA’s are poorly prepared and therefore they obtain a negative reputation, but they are badly misunderstood and very underutilised.
Directors and their Associates, and Associates of a company.
A person appointed to take charge of assets, usually when they are subject to some legal dispute. The procedure may be used other than for a limited company, for example, to settle a partnership dispute or in equitable execution (e.g. in a divorce)
County Court Judgement (CCJ)
A Court order acknowledging that a debt is due and that you have been unable to pay it as you should have done. You may be able to agree terms for payment with the court, but if not the CCJ will now give a Creditor the opportunity to take further recovery action such as instructing an Enforcement Agent or seeking a Charging Order.
Any party that is owed money, be that party an individual, corporate or business. Creditors can be Secured or Unsecured and their different status provides them with different powers and rights.
A group of between 3 and 5 Creditors appointed to assist the Office Holder during the course of an Insolvency process. The Creditors Committee often makes decisions on behalf of the general body of Creditors.
A meeting of the Bankrupt’s/company’s creditors where resolutions are passed or important decisions about the Insolvency Process are made. These can include, for example the basis of remuneration of the Trustee in Bankruptcy, Liquidator or Administrator.
All creditors are entitled to attend and vote at meetings either in person or by proxy. In some Insolvency processes they provide the opportunity for Creditors to attend and question those previously in charge of the company.
Creditors’ Voluntary Liquidation
When a company’s assets are insufficient to cover its liabilities (i.e. it is Insolvent) and it is voluntarily placed into Liquidation, it is formally known as a Creditors Voluntary Liquidation.
The shareholders pass a resolution to place the company into Liquidation. The directors of the company produce a document known as a Statement of Affairs to show creditors what assets and liabilities the company has.
A creditors meeting is held within 14 days of passing the winding up resolution, usually it is straight after the shareholders meeting, where creditors ratify the identity of the Liquidator.
It is not only a limited company that can enter into Creditors’ Voluntary Liquidation – An LLP may also enter into creditors’ voluntary liquidation.
An legal instrument creating security over a company/LLP’s assets. The Debenture may contain a Fixed Charge and/or Floating Charge. It must be registered at Companies House within 21 days of creation to be 100% valid.
An individual/company/business who owes money to his/her/its Creditors. If you look at it from a Creditor’s perspective the person who owes them money is a debtor to them.
In accounting terms it is simply someone who owes you money.
Declaration of solvency
A summary statement showing the assets and liabilities of a company together with a statement that the company will be able to pay its debts together with interest and costs within 12 months of the liquidation commencing. It is required in a Member’s Voluntary Liquidation to demonstrate that the company is solvent. It is sworn by the majority or all (where they number less than 2) of directors. Making an incorrect declaration (i.e. where the business is insolvent) can have severe consequences.
There are 3 types of director:
- De Jure director – someone officially appointed and registered at Companies House
- De Facto director – someone who is not formally appointed but carries out their duties as if a director and is thought of as a director by those both internally and externally to the company
- Shadow director – someone upon whose instructions and decisions the de jure and/or de facto directors act. A shadow director often acts behind the scenes because there is a reason he/she cannot be appointed.
Disabilities of a Bankrupt
It is a criminal offence for an undischarged bankrupt to, amongst other things:
- Act as a Director or take part in the management of a limited company;
- Obtain credit of over £250 without disclosing his/her status;
- Trade in a name other that that under which he/she was made bankrupt;
- Hold certain public and other offices
When a Bankrupt is no longer subject to the automatic restrictions of Bankruptcy they are said to be discharged. Until that time a Bankrupt might also be known as an undischarged bankrupt. Discharge occurs after 12 months unless the Discharge is suspended, which usually only happens if the Bankrupt has failed to co-operate with the Official Receiver or Trustee in Bankruptcy, or has been guilty of wrongdoing prior to being made Bankrupt.
Is the seizure of someone’s property in order to obtain payment of money owed. Distraint may be as a result of the exercise of a warrant of execution by an Enforcement Agent on behalf of a Creditor, it may be by the statutory right to distrain e.g. HMRC in relation to tax debts. Once Distraint has occurred goods may be removed and sold at auction in an attempt to recover money owed. If Distraint has occurred or is threatened urgent advice is needed to protect your assets.
Disqualification/Disqualification Order/Disqualification Undertaking
A director of a limited company, member of an LLP or partner in a traditional partnership can be disqualified if a Liquidator,Administrator or Administrative Receiver establishes sufficient evidence of “unfit” conduct.
Directors/members/partners can voluntarily undertake not to act in the position of Director – known as a Disqualification Undertaking – or can receive a Disqualification Order from the court banning them from acting as a Director.
A company is dissolved when it is removed from the register at Companies House. It is possible to do this voluntarily if, amongst other things, the company ceased trading at least 3 months earlier. After a company is dissolved it is possible to restore it to the register but this is very unlikely to happen if it was preceded by Liquidation or Administration.
Dividend or Distribution
A payment made out of assets Realised by the Licensed Insolvency Practitioner who is holding the office of (for example) Liquidator to Creditors of the Bankrupt or Insolvent Company. Dividends are paid at the same rate to everyone within a particular class of Creditor.
Extortionate Credit Transaction
A transaction where credit is provided on terms that are exorbitant or grossly unfair, compared with the risk accepted by the creditor. This transaction may be challenged either by an Administrator, a Liquidator or a Trustee in Bankruptcy.
A type of security given by a company or LLP to a lender over a specific asset (e.g. property, goodwill or trade marks) when borrowing money.
Under a Fixed Charge the borrower is not free to sell the asset without obtaining permission from the lender. The assets secured are normally significant or immoveable and specifically identifiable. Debtors or book debts can be subject to a fixed charge when the borrower has entered into a factoring or invoice discounting agreement.
An alternative type of security granted by a company or LLP to a lender over general assets when borrowing money.
Under a Floating Charge the borrower is free to deal with these assets as it so desires, unlike those held under a Fixed Charge.
Floating Charge assets include items such as debtors (unless these are secured by a Fixed charge in favour of a factoring or invoice discounting provider), stock and office equipment.
When a director(s) of a company or member(s) of an LLP has run the company/LLP with intention of defrauding creditors, or for any fraudulent purpose, this is known as Fraudulent Trading.
Proving Fraudulent Trading is often very difficult to do as the criminal burden of proof must be overcome – that is establishing beyond reasonable doubt that the company was run with the intent of defrauding creditors.
If found guilty of Fraudulent Trading, not only is it a criminal offence but those involved can be made personally liable for the debts of the company.
Fraudulent Trading is covered in detail by Section 213 of the Insolvency Act 1986.
The term used to describe a business that is continuing without any question or concern over its future.
A legal commitment to repay a debt, if the original borrower fails to meet his obligations. Directors of companies or members of LLP’s may often give guarantees to banks in return for the bank financing their companies.
Individual Voluntary Arrangement (IVA)
A legally binding solution for overindebted individuals and sole traders who are struggling to pay their debts. It is an agreement between a person and his/her creditors to repay some or all of the debt over a period of time. It avoids the consequences of bankruptcy but will typically last for 5 years or until the debts are paid in full if this is sooner.
Section 123 of the Insolvency Act defines Insolvency as:
o Insufficient Assets to meet all debts
o Inability to pay debts as they fall due (e.g. being late with tax payments or exceeding credit terms)
o Unsatisfied CCJ in whole or in part
o Unpaid Statutory Demand >£750
Establishing and understanding the point of Insolvency for you and/or your business is crucial to ensure you can enter into an Insolvency process and to understand the point at which you must take action to avoid dire consequences (e.g. personal liability in a limited company)
Insolvency Act 1986
Primary piece of legislation governing England and Wales Insolvency Law and Practice.
A Liquidation where the available assets are insufficient to pay all debts. An insolvent liquidation will either take the form of a Compulsory Liquidation or Creditors’ Voluntary Liquidation.
Insolvent Partnerships Order 1994 (IPO)
An Order setting out the procedures for dealing with insolvent partnerships. The Order provides for winding up an insolvent partnership as an unregistered company, with or without concurrent insolvency proceedings against individual partners; for the joint bankruptcy of individual partners, without winding up the partnership as an unregistered company; and for the application of the administration and company voluntary arrangement procedures to insolvent partnerships.
Insolvency Practitioner or Licensed Insolvency Practitioner
A person who has been assessed as being competent in Insolvency and has been granted a license from one of the recognised professional body to hold office as Trustee In Bankruptcy, Nominee or Supervisor in relation to a voluntary arrangement, Liquidator, Administrator or Administrative Receiver.
Only Licensed Insolvency Practitioners are regulated and insured to provide Insolvency advice and administer Insolvency procedures. Each Insolvency Practitioner has a licence number. To check whether your adviser has an Insolvency licence click here.
An individual who intends to propose a voluntary arrangement to his/her creditors may apply to court for an order preventing any action being commenced or continued whilst the order is in force – e.g. no bankruptcy order may be made and no other legal proceedings may be carried out (e.g. Enforcement Agents).
Law of Property Act 1925
Governs transactions in law and property. Contains statutory powers of receivers appointed under a fixed charge.
As defined by the Law of Property Act 1925, an LPA Receiver is a person (not necessarily an insolvency practitioner) appointed to take charge of a mortgaged property by a lender whose loan is in default, usually with a view to sale or to collect rental income for the lender. An LPA Receiver may be used, for example, upon the failure of a property developer, whose borrowings will largely be secured on specific properties.
A person who holds an Insolvency Licence issued by one of the recognised professional bodies.
A right to keep possession of assets or documents belonging to another individual or corporate until an outstanding debt is settled. Liens over books and records are unenforceable in most Insolvency procedures.
A process which involves the winding up of a company/LLP/Partnership’s life, the disposal of its assets, collection of its debts and the distribution of the proceeds to the entity’s Creditors in the priority laid down in the Insolvency Act 1986.
The Liquidation of a company/LLP/Partnership is followed by its dissolution.
Another name for a Creditors Committee appointed in a Liquidation.
The name given to the Insolvency Practitioner in any type of Liquidation. The Liquidator’s duty is to Realise the assets of the company/LLP/partnership and distribute any available proceeds to creditors.
Court order preventing the disposal of assets.
Members’ Voluntary Liquidation (MVL)
The company is solvent and the directors make a Declaration of Solvency confirming that the company is able to pay its debts and liabilities together with costs and interest in full within 12 months. Any surplus is distributed to shareholders who will be able to claim Entrepreneurs Relief on this distribution and pay tax at 10%.
Breach of duty by a company/LLP’s directors/members in respect of their dealings with company/LLP funds or property. A Liquidator has a right to sue a the offending party for Misfeasance to recompense the company Creditors.
A freeze on any legal or other process for a specific period of time. Moratoriums are available to Individuals and Companies/Partnerships under different Insolvency Procedures such as an IVA, CVA or Administration.
A Liquidator, Provisional Liquidator, Administrator, Administrative Receiver, Nominee or Supervisor of a voluntary arrangement, or Trustee In Bankruptcy.
A representative from the Insolvency Service who deals with Bankruptcy and Compulsory Liquidation.
Partnership Voluntary Arrangement (PVA)
A legally binding agreement between a partnership and its creditors to repay some or all of its debt over a period of time.
It is a solution for partnerships who are struggling to pay their debts. It is designed to allow the partnership to continue trading and repay its historic debts out of future profits.
It avoids the consequences of winding up the partnership and will typically last for up to 5 years. IVA’s may also be needed for the partners.
A written application to the court and used by creditors, individuals or directors to commence proceedings to wind up a company (Compulsory Liquidation) or place it into Administration, or make an individual Bankrupt.
A type of transaction carried out by a company’s directors prior to an Insolvency process commencing, or a Debtor prior to bankruptcy, intended to favour one creditor over another (also known as putting them in a better position).
For example – Lucas owes Johnson and Phil £25,000 each, Lucas receives £30,000 and chooses to give £25,000 to Johnson but only £5,000 to Phil – this transaction was intended to favour Johnson and could therefore be a Preference.
Preference transactions can be challenged by a Liquidator, Administrator or Trustee in Bankruptcy if they took place within the period of 6 months ending with the onset of Insolvency or the presentation of the bankruptcy petition or in the case of a connected party within 2 years ending with the onset of Insolvency or the presentation of the bankruptcy petition. and if successful can result in payments being recovered from either the beneficiary of the Preference or the directors of the company.
A Creditor who is paid ahead of unsecured Creditors and floating charge Creditors. Occupational Pension Schemes and Employees (for £800 of wage arrears and all holiday pay) are the most common. May people think HM Revenue & Customs hold this elevated status, but did you know HM Revenue & Customs lost this status on 15 September 2003?
Proof of Debt
A document of form submitted by a Creditor providing details of what is owed to a Creditor.
The name given to a Licensed Insolvency Practitioner appointed to safeguard a company’s assets after presentation of a Winding Up Petition.
A form giving a creditor or a member/shareholder the right to vote at a creditors’ or members’ meeting when they cannot be present by appointing a proxy holder to vote on their behalf.
When a company is in Compulsory Liquidation or in Bankruptcy proceedings, the Official Receiver may, at any time, apply to the court to question the company’s director(s) or any other person who has taken part in the promotion, formation or management of the company; or the bankrupt. Failure to attend a public examination can lead to an arrest warrant being issued.
Realising an asset means selling it or disposing of it to raise money, or collecting it in in the case of debtors or cash at bank.
The commonly used name for an Administrative Receiver. A Receiver may also be the person appointed by a secured creditor holding a fixed charge over specific assets of a company in order to take control of those assets for the benefit of the secured creditor.
The general term applied when a person is appointed as a Receiver or Administrative Receiver.
Recognised Professional Body (RPB)
An organisation able to authorise its members to act as Licensed Insolvency Practitioners.
A procedure that cancels or rescinds a Winding Up Order. Similar to Annulment in a Bankruptcy.
Reservation (or Retention) of Title
A clause used in a contract by a seller to retain legal title to the goods they have supplied until such time as they are paid for. Under the Sale of Goods Act title passes upon delivery unless this default position is changed within the terms and conditions of supply/purchase. It is a complex and continually evolving area of law.
Scheme of Arrangement
A compromise or arrangement between a company and its creditors or members or any class of them under section 425 of the Companies Act 1985, which may involve a scheme for the reconstruction of the company. If a majority in number representing three-quarters in value of the creditors, or members, or any class of them, agree to the compromise or arrangement, it is binding if sanctioned by the court. Section 425 may be invoked where there is an administration order in force in relation to the company, where there is a liquidator or provisional liquidator in office, or where the company is not subject to any insolvency proceedings.
A Creditor who holds security over a person’s/company’s assets, e.g. a bank, or other financial institution. This class of Creditor is paid from the proceeds of the sale of the security – i.e. before unsecured creditors.
Someone upon whose instructions and decisions the de jure and/or de facto directors act. A shadow director often acts behind the scenes because there is a reason he/she cannot be appointed.
An individual carrying on business in their own right and not through a limited company. A Sole Trader is personally liable for the debts of this/her own business.
Often a professional appointed to assist the Official Receiver, Liquidator or Trustee in Bankruptcy in managing an insolvent’s business.
Statement of Affairs
A document giving details of a individual’s/company’s assets and liabilities.
A document issued by someone who is owed a debt requiring the Debtor to make payment within 21 days. The party receiving it has 18 days in which to apply to set it aside if they disagree with it. After 21 days a Bankruptcy Petition or Winding Up Petition may be issued without further notice.
A Statutory Demand should never be used where the debt is disputed.
Order to appear or to produce evidence to a Court.
The Licensed Insolvency Practitioner appointed to oversee a Company Voluntary Arrangement or Individual Voluntary Arrangement.
Transaction at an Undervalue
The disposal of a company’s or individual’s assets or any other transaction which occurs at a significant reduction to true value within the 2 years prior to Liquidation or Administration, or within the 5 years prior to Bankruptcy.
Transactions at an undervalue can be challenged by a Liquidator, Administrator or Trustee In Bankruptcy. The outcome of any challenge can be the recovery of the assets disposed of or payment being recovered from either the beneficiary or (in the case of a company) the directors.
Trustee in Bankruptcy
The name given to the Insolvency Practitioner or Official Receiver in any Bankruptcy. The Trustee in Bankruptcy’s duty is to Realise the assets of the Bankrupt in an attempt to secure repayment for the Bankrupt’s Creditors.
Any creditor who does not hold security over the insolvent individual’s/company’s assets. This class of creditor will be the last in the queue to receive a Distribution from the insolvency procedure.
Creditors’ Voluntary Liquidation (CVL): relates to an insolvent company. It is commenced by resolution of the shareholders, but is under the effective control of creditors, who can choose the liquidator.
Members’ Voluntary Liquidation (MVL): A solvent liquidation where the shareholders appoint the liquidator to Realise assets and settle all the company’s debts, plus interest, in full within 12 months.
An agreement signed by a debtor not to remove goods levied by a bailiff under the authority of a warrant of execution and to allow the bailiff access at any time to inspect the goods, in consideration of which the bailiff leaves the goods in the possession of the debtor.
A term that strictly applies to a company/LLP/partnership going into Compulsory Liquidation, but it is sometimes used to describe a voluntary winding up, which is a Creditors’ Voluntary Liquidation or a Members’ Voluntary Liquidation.
Winding Up Order
An order made by the court that confirms that the company is to be placed into Compulsory Liquidation.
Winding Up Petition
A Petition presented to the Court requesting that a Winding Up Order is made to place the Company into Compulsory Liquidation
Writ issued by the court directing a sheriff to levy execution upon a debtor’s goods.
This occurs where the directors of a company (or members of an LLP) have failed to take every step to minimise losses to creditors when they knew or ought to have known that there was no reasonable prospect of the company/LLP avoiding Insolvent Liquidation. The Liquidator can sue the directors (members of an LLP) for a contribution to the company/LLP’s assets that will form part of any Distribution to creditors.
Wrongful Trading is covered in detail by Section 214 of the Insolvency Act 1986.