Glossary of Insolvency Terms
This is a formal insolvency process requiring the appointment of a licensed insolvency practitioner.
The purpose of administration is to save the company, or if that is not possible, to achieve a better result for creditors than in a liquidation. If these are not possible, the purpose of the administration is to realise property to enable funds to be distributed to secured or preferential creditors. An insolvency practitioner is either appointed by the Court under an administration order, by a floating charge holder or by the company or its directors filing a Notice of Intention to Appoint or Notice of Appointment at Court.
Once the process of administration is entered into, then no proceedings or action can be taken against the company without the court’s consent (or that of the Administrator in office).
An order made by the court placing a company that is, or is likely to become, insolvent under the control of an administrator. A company can be put into administration if a floating charge holder, the directors or the company file the requisite notice at Court. The purpose of the administration order is to preserve the company’s business and assets to allow a re-organisation whilst protecting it from action by its creditors.
It is also an order made in a County Court to arrange and administer the payment of debts by an individual.
An administrative receiver is a licensed Insolvency Practitioner appointed by the holder of a floating charge to recover monies owed to the lender. Administrative receivership is rare now and is only available where the legal charge pre-dates 15 September 2003.
An Administrator is a licensed Insolvency Practitioner appointed to manage the affairs of a company to achieve the purpose of administration.
An annulment is a procedure which to bankruptcy only. It allows for a bankruptcy order to be cancelled by a Court Order and puts the person back into the same position they were in before bankruptcy. An application for an annulment can be made at any time following bankruptcy and even if the bankrupt has already been discharged.
Anything that belongs to someone that could be used to pay his/her debts.
A bankrupt is an individual against whom a bankruptcy order has been made by the Court
Bankruptcy is the process of dealing with the estate of a bankrupt.
A bankruptcy order is a Court order made against an individual who is unable to pay his/her debts.
A bankruptcy petition is an application to the Court made by a creditor (or the debtor himself/herself) for a bankruptcy order to be made against an individual. In the case of a creditor, it is a condition that the debt owed exceeds £5000.
Bankruptcy restrictions order or undertaking
A bankruptcy restrictions order or undertaking applies to a bankrupt who has been dishonest or in some other way to blame for his/her bankruptcy. A court order can be made which will mean that bankruptcy restrictions continue to apply after discharge for a period of between two to fifteen years.
A charge is a security interest taken over property by a creditor to protect against non-payment of a debt. Charges may be legal or equitable. A legal charge, for example, is often taken out by a mortgage company to secure its interest when it lends to a customer. A legal charge must be granted by the legal owners of the property or thing concerned. An equitable charge however, can be granted by just one owner, over their interest in the property or thing, although they can more easily be defeated and so are not as secure as a legal charge.
A charging order is a Court order placing restrictions on the sale/transfer of a certain asset such as property. Judgment must be obtained first and this provides priority of payment to creditors upon the sale of the property.
Company Directors Disqualification Act 1986
An Act of Parliament governing the process used to disqualify a director.
Company voluntary arrangement (CVA)
A company voluntary arrangement is a legally binding agreement between a company and its creditors reorganising the company’s debts to repay some or all of its debt over a period of time. The company voluntary arrangement is controlled by a Supervisor.
A compulsory liquidation of a company is a liquidation ordered by the Court, usually as a result of a winding up petition having been presented by a creditor. This type of liquidation applies where a creditor has petitioned the Court for the winding-up of the company.
A contributory is a person who is liable to contribute to the assets of a company if it is wound up, whether by winding up petition at court or otherwise. For example, a shareholder is a contributory who has not paid for his/her shares in full.
Court appointed receiver
A Court-appointed receiver is a person appointed to take charge of assets usually subject to litigation to preserve them pending the outcome of the dispute. The Court appointed receiver does not necessarily need to be a licensed Insolvency Practitioner.
A person who is owed money by another.
Creditors voluntary liquidation (CVL)
A creditors’ voluntary liquidation relates to an insolvent company. The company’s shareholders decide that the company should be liquidated and the creditors decide who shall be appointed liquidator. The company stops trading and its assets are sold.
A debtor is any person who owes money to another.
A debenture is a formal document usually in writing and under seal stating the terms of a loan or granting of security usually to a company. A debenture may be secured on part or all of a company’s assets. Where a company’s principal secured creditor is a bank, a debenture in favour of the bank is likely to create fixed and floating charges over all of the company’s assets.
A director is a person who conducts the affairs of a company. Also known as an officer of the company.
Disqualification of directors
The disqualification of a director usually refers to a director found to have conducted the affairs on an insolvent company in an ‘unfit’ manner which could lead to a prosecution by the Disqualification Unit of the Insolvency Service. As a result of disqualification of a director, the individual is not allowed to hold any management position in a company for between 2 and 15 years. It is possible to offer a disqualification undertaking to avoid Court action.
The formally closing of a company and removing it from the register at Companies House. It ceases to exist as a legal entity when it is dissolved. It is possible to apply to the Court to have a dissolved company restored to the register.
A dividend is a sum distributed to unsecured creditors in an insolvency process.
A fixed charge is a form of security granted over specific assets, preventing the debtor from dealing with those assets without the consent of the secured creditor.
A floating charge is a charge held over general assets of a company which can change (such as stock). The company can use the assets without the consent of the secured creditor until the charge “crystallises” (becomes fixed). Crystallisation occurs on a specific trigger such as the appointment of an administrative receiver, presentation of a winding up petition or as provided for in the document which creates the charge.
Fraudulent trading is the running of a company with intent to defraud creditors. A liquidator can sue any person responsible for fraudulent trading. It is also a criminal offence.
A guarantee is an agreement to pay a debt owed by a third party which must be evidenced in writing to be enforceable.
Individual voluntary arrangement (IVA)
An individual voluntary arrangement is a formal agreement with creditors to pay all or part of the debts over a fixed period of time. The IVA is approved if 75% by value of the creditors approve the scheme.
Insolvency is the position of not having enough assets to meet all debts (the value of assets is less than the amount of liabilities) or being unable to pay debts as and when they fall due. If a creditor can establish that an individual or company is insolvent, he or she can present a bankruptcy petition or a winding-up petition.
Insolvency Act 1986
The Insolvency Act 1986 is the primary legislation which governs personal and corporate insolvency practice in the UK.
Insolvency practitioner (IP)
An insolvency practitioner is someone licensed and authorised to act as an office holder in relation to an insolvent partnership, company or individual.
An interim order is a Court Order which stops someone commencing bankruptcy or other legal proceedings whilst the Order is in force. It enables an IVA to be put to creditors for approval and implementation.
A lien is the right to keep possession of assets or documents belonging to another person until a debt owed by that person is paid.
A liquidation is the procedure whereby a company has its assets realised and distributed to satisfy, if possible, its liabilities. It is also known as a winding up of a company.
A liquidator is a licensed insolvency practitioner appointed to wind up the affairs of a company.
Member (of a company)
A member is a person who has agreed to be and is registered as a member of a company, such as a shareholder.
Members’ voluntary liquidation (MVL)
A members’ voluntary liquidation is a solvent liquidation (as opposed to an insolvent liquidation) of a company where its shareholders appoint a liquidator to realise assets and settle the company’s debts.
A mortgage is a transfer of an interest in land or other property by way of security which is redeemable upon paying an outstanding sum of money.
A nominee is a licensed insolvency practitioner who carries out the preparatory work for a voluntary arrangement, before its implementation.
Official receiver (OR)
An Official Receiver (OR) is a government official employed by the Insolvency Service, which is an executive agency of the Department of Business, Innovation and Skills (BIS).
A petition is a written application to the Court for relief or remedy. For example, it can be a winding up petition (company) or bankruptcy petition (personal).
A preference can be given by a company or an individual if they do something to put a creditor in a better position on a winding up or bankruptcy. A Liquidator or Trustee in Bankruptcy can apply for an order restoring the position to what it was before the preference.
A preferential creditor is entitled to receive certain payments in priority to floating charge holders and other unsecured creditors. They include certain employee claims and contributions to pension schemes.
Proof of debt
A proof of debt is a form submitted by a creditor to the licensed Insolvency Practitioner or Official Receiver giving evidence of the amount of the debt being claimed.
A provisional liquidator is the Official Receiver or licensed Insolvency Practitioner appointed to preserve a company’s assets pending the hearing of a winding up petition.
Instead of attending a creditor’s meeting a person can appoint someone to go and vote in their place.
A proxy form is completed by a creditor if he/she wishes someone else to represent him/her at a creditors’ meeting and vote on his/her behalf.
A public examination is a hearing at Court where the Official Receiver can force a company’s director(s), a bankrupt or any other person to provide information concerning the financial affairs/dealings of the company or bankrupt. The examination is conducted in open court and under oath.
To realise an asset means the selling of it or disposing of it to raise money and receive the proceeds.
The receiver is the generally used name for an administrative receiver. A receiver can also be appointed by the Court.
A receivership is the general term applied when a person is appointed as receiver or administrative receiver over certain assets such as property.
A secured creditor holds security over assets, for example, a mortgage company. This class of creditor is paid before ordinary creditors.
A shadow director is a person who is not formally appointed to be a director of a company but gives instructions on which its directors are accustomed to act.
Statement of affairs
A statement of affairs is a formal document sworn under oath, which is completed by a bankrupt, company officer or director(s) detailing assets, debts and creditors.
A statutory demand is a formal written notice asking for payment of a debt from an individual or company within 21 days. It is used as the first step in bankruptcy (individuals) and compulsory winding up (company or partnership). To issue bankruptcy proceedings the debt must be £5,000 or more. To issue a winding up petition the debt must be £750 or more.
A supervisor is an IP appointed to supervise the carrying out of a company voluntary arrangement or individual voluntary arrangement.
Transaction at undervalue
A transaction at undervalue refers to a company or individual making a gift or entering into a transaction in which the value to them is significantly less than the value to the other party. These transactions can be challenged by a Liquidator or Trustee in Bankruptcy.
UNCITRAL (United Nations Commission on International Trade Law) is a set of model guidelines and recommendations applied in cross border insolvency matters which is not binding but can be adopted into domestic law by states across the world.
An unsecured creditor is any creditor who does not hold security (such as a mortgage) for money owed. This class of creditor will rank last in cases where a dividend is likely to be paid.
A voluntary arrangement is a formal agreement entered into by a company (Company Voluntary Arrangement) or a person (Individual Voluntary Arrangement) with its creditors to repay all or part of a debt over a fixed period of time.
A voluntary liquidation is a method of liquidation which does not involve the Courts or the Official Receiver. There are 2 types of voluntary liquidation, a members’ voluntary liquidation for solvent companies and a creditors’ voluntary liquidation for insolvent companies.
A winding-up order is an order made by the Court for a company to be placed into compulsory liquidation.
A winding-up petition is presented to the Court seeking an order that a company be put into compulsory liquidation.
Wrongful trading applies where the directors of a company know or should know that it has no reasonable prospect of avoiding insolvent liquidation. In such circumstances, the directors must take all reasonable steps to avoid losses to creditors. The directors can be sued for the losses to creditors.