Glossary of Insolvency Terms
Below are a list of commonly used terms that are used in insolvency procedures:
A company enters Administration so that the Administrator can achieve one of the statutory purposes of Administration in accordance with Paragraph 3 of Schedule B1 of the Insolvency Act 1986.
The name given to the Insolvency Practitioner who is appointed to act when a company enters Administrative Receivership.
Where the holder of a floating charge debenture appoints an Administrative Receiver in order to realize the assets of the company to pay back the debt owed to the debenture holder.
The name given to the Insolvency Practitioner who is appointed to act when a company enters Administration.
Individuals or Companies who are associated to the insolvent company or individual, associates usually include family members, connected companies, employees.
An individual that is subject to a Bankruptcy Order and has not been discharged.
An order made by the court when an individual is unable to pay their debts as and when they fall due. A bankruptcy order can either be made upon a petition of a creditor who is owed money or on an application by the individual themselves to an Adjudicator.
A legal document which gives the creditor security over certain assets/property, once the assets/property are sold the creditor which has been given the charge is paid from the proceeds of sale.
When a creditor obtains a county court judgment (CCJ) in respect of an unpaid debt, the creditor can apply to the court for the CCJ to attach to the debtor's property. When the property is sold the CCJ is paid by the conveyancing solicitors, unless the debt has previously been settled. Once a charging order has been granted the creditor can apply to the Court for possession and sale of the property.
Company Directors Disqualification Act (1986)
The Company Directors Disqualification Act (CDDA) is the primary legislation which is used to disqualify an individual from being a director of a limited liability company.
Company Voluntary Arrangement
A Company Voluntary Arrangement or CVA allows a company to reorganise or restructure its current debt obligations so that the company can continue to trade.
A composition is an agreement between the debtor and creditor which allows a reduced amount of the debt obligation to be paid in full satisfaction of the original amount owed.
A company goes into compulsory liquidation when a winding up order is made by the Court.
A person who is liable to contribute to the assets of an insolvent company.
Someone who is appointed by the Court in order to manage specific assets which are usually subject to a dispute.
A committee made up of between 3 and 5 creditors who are appointed to represent the interests of all the creditors of either the insolvent company or individual. The members of the Creditors’ Committee can direct the appointed officeholder in his duties of investigating into the business and affairs of the insolvent. The Committee can pass a number of required resolutions on behalf of the full body of creditors.
Creditors’ Voluntary Liquidation
A Creditors' Voluntary Liquidation or CVL is a process initiated by the directors of the company to place the company into insolvent liquidation without the requirement of court proceedings.
A debenture is a legal charge which is created in order to secure monies borrowed on all or part of a company's property. The debenture should be registered at Companies House otherwise it may be voidable for non registration.
Deed of Arrangement
Deeds of Arrangement were in place prior to the implementation of IVA's, they have recently been withdrawn from legislation and are no longer available to use.
Disqualification of Directors
Director disqualification can last anywhere between 2 to15 years. A disqualified director is prohibited from acting as a director of a company, taking part, directly or indirectly, in the promotion, formation or management of a company.
Extortionate Credit Transaction
This applies to companies who are in Liquidation or Administration and individuals who are Bankrupt whereby they have entered credit agreements where the interest levels are excessively high bearing in mind the circumstance in which the credit was obtained. Ultimately the appointed Liquidator or Trustee can apply to court for an order that the creditor repays all sums that form part of the transaction.
This is a legal charge that is secured on specific assets, whereby the holder of the fixed charge has the power to sell the asset through the appointment of a fixed charge receiver in the event of a default. The fixed charge creditor will be entitled to the first proceeds of sale. Examples of a fixed charge are mortgages on property, debtors subject to a factoring agreement, motor vehicles subject to a hire purchase agreement, plant and machinery which is fixed to the premises.
This is legal charge whereby the holder of the floating charge has security over assets which are not subject to a fixed charge. The holder of a floating charge can only enforce the security through the appointment of an Administrator or an Administrative Receiver (only where the charge was created prior to 15 September 2003 in most circumstances). Examples of assets subject to a floating charge are stock, plant and machinery, debtors not subject to a factoring agreement.
Where the directors or anyone who works for a company has carried on business with the intent to defraud creditors. If an individual is found guilty this carries both a civil and criminal personal liability.
Where there is a sale of a business and the acquiring company intends to carry on the same kind of business as the seller. In certain circumstances when there is a sale of a business as a going concern this may be exempt from VAT.
This is where another party be it a company or individual commits to repay the outstanding debt of another. The usual circumstance is a director giving a personal guarantee to repay the outstanding debt owed to a bank if any shortfall arises when the debt is called in and the company cannot pay.
Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement is a contractual obligation to compromise the individual’s debt owed to their creditors in full and final settlement of all liabilities owed.
Where either a company or individual is unable to pay their debts as and when they fall due (cashflow test) or that their liabilities exceed their assets (balance sheet test).
Insolvency Act 1986 (IA 1986)
The primary legislation governing the process of dealing with any formal insolvency proceedings.
When a company is either subject to a Creditors' Voluntary Liquidation or winding up by the court.
A moratorium on any legal proceedings in the intervening period between issuing the IVA proposal to creditors and the creditors’ meeting. An Interim Order can only be granted by the Court.
A judgment is an Order granted by the Court.
Law of Property Act 1925 (LPA)
This is the legislation which governs the appointment of a fixed charge receiver also known as an LPA Receiver.
This is an individual who is appointed in order to sell the property subject to a fixed charge and also has the ability to collect rents owed and pay directly to the chargeholder. You don’t need to be a Licensed Insolvency Practitioner to act as an LPA Receiver.
Licensed Insolvency Practitioner
A person who is authorized to act as an officeholder in the relevant insolvency proceedings, an Insolvency Practitioner can act as a Liquidator, Administrator, Administrative Receiver, Nominee, Supervisor, or a Trustee. An insolvency license is issued by the recognized professional body.
Is the right to hold assets or documents of title until a debt has been settled. If a company is in Liquidation or Administration a lien cannot be enforced over books and records of the company.
The same a creditors' committee but only applies to companies in Liquidation.
The name given to the appointed Insolvency Practitioner when a company is in Liquidation.
A world wide freezing injunction over the assets of a company or individual
A shareholder of a company or a partner in limited liability partnership.
Members’ Voluntary Liquidation
A Members’ Voluntary Liquidation is where the company is solvent and all creditors can be paid in full plus statutory interest within 12 months from the date of Liquidation.
A legal remedy for a breach of fiduciary or any other duty when acting as director, or an individual who has taken part, in the promotion, formation or management of a company, this also extends to an Insolvency Practitioner who acted as a Liquidator or Administrator of a company.
A legal charge that is given to securitize any borrowing against a property, the property cannot be sold without consent of the holder of the mortgage.
The name given to the Insolvency Practitioner whilst an IVA or CVA is being proposed to creditors. The Nominee will provide an opinion report on the proposals to creditors and act as the chairman at the meeting of creditors.
This is the generic name given to an Insolvency Practitioner who acts as a Liquidator, Administrator, Administrative Receiver, Trustee, Nominee or Supervisor.
A civil servant who acts as receiver and manager of every court appointed Liquidation and Bankruptcy until either a Liquidator or Trustee is appointed. The Official Receiver will investigate into the reasons why a company has been wound up or an individual has been declared Bankrupt and take the necessary action where appropriate.
The Insolvency (England and Wales ) Rules 2016
The secondary legislation detailing how the laws of the Insolvency Act 1986 are carried out.
Onerous property is defined as any unprofitable contract and any other property which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act. A Liquidator or a Trustee in Bankruptcy can disclaim onerous property.
A petition is a formal written application to a court for an order of the court for relief or remedy.
Where Companies or individuals transfer money or assets to a Creditor, which puts a creditor in a better position on a bankruptcy or winding up, subject to certain conditions.
A Creditor whose debts are preferential, as defined in the Insolvency Act 1986, and are therefore entitled to receive payment in priority to other creditors.
Proof of Debt
A document submitted by a creditor that evidences the creditor’s debt.
A Licensed Insolvency Practitioner appointed by the court, after the presentation of a winding up petition, usually to safeguard the company's assets, preserve the company's books and records or to protect the public.
Authority given by a creditor to a person who represents the creditor, usually at a creditors’ meeting for the purposes of voting.
A person duly nominated by a creditor to represent the creditor, usually at a creditors’ meeting for the purposes of voting.
An individual, appointed by the court or a charge holder, who may take possession of property for its protection or realisation.
When an individual is appointed as a Receiver over an asset or assets of a debtor. The appointment of a Receiver is a remedy for creditors to protect their interest in assets.
Recognised Professional Body (RPB)
Independent professional bodies who are recognised by the Secretary of State for the purposes of authorising their members to act as Insolvency Practitioners. RPBs are independent bodies and are obligated to have rules in place to ensure their Insolvency Practitioners meet acceptable standards. The Insolvency Service regulates the RPBs to ensure that the members they authorise are fit to act as Insolvency Practitioners.
Reservation of Title
A form of security where a supplier of goods retains title to the goods sold until the buyer pays for the goods. This security is used as protection against the possibility of the buyer’s default or insolvency. It does not usually constitute a charge on the goods but entitles the seller to priority over other creditors in respect to the goods until the goods are paid for.
A creditor who holds security over the company's assets. A secured creditor has the right to be paid before any other creditors from the proceeds of sale of the charged asset.
A charge or mortgage over assets which secures the payment of a debt. If the debt is defaulted, the lender has a right to sell the charged assets.
An individual who acts in the capacity of a director without being formally appointed. Shadow directors are still recognised in law as directors and can be subject to claims and director disqualification as if they were an actual director, therefore they must act in accordance with their director duties.
An individual appointed by the court to assist the Liquidator or Official Receiver to manage the business of the company or individual, in the Liquidation of a company or Bankruptcy of an individual.
A formal notice demanding payment of a debt within 21 days and served on a debtor. If the debt is not paid a winding-up petition or Bankruptcy petition may be presented.
A Licensed Insolvency Practitioner appointed to supervise either an Individual Voluntary Arrangement or a Company Voluntary Arrangement.
Transactions at an Undervalue
Where a gift or a transaction in which the value received is nil or significantly less than that given. Transactions of this nature can be challenged by an Administrator, a Liquidator or a Trustee in Bankruptcy if certain criteria are met.
Trustee in Bankruptcy
An Insolvency Practitioner or Official Receiver who is responsible for realising a Bankrupt’s assets for the benefit of creditors.
A creditor who holds no security over any of the debtor's assets in relation to the debt owed to them.
An individual who has been declared bankrupt and who has not yet been discharged.
VAT Bad Debt Relief
A relief which allows a company to claim a refund of output tax from HMRC, where a debt has remained unpaid for six months, providing all the conditions for the relief are met. A refund must be repaid to HMRC if the company receives payment from their customer.
A Liquidation not ordered by the court but by a Members’ Voluntary Liquidation or a Creditors’ Voluntary Liquidation.
The process for placing a company into Liquidation. During this process, the assets of a company are realised and any proceeds available after payment of the costs and expenses of the Liquidation are distributed to creditors in order of priority.
An order of the court for the compulsorily winding up (also known as Liquidation) of a company.
The petition presented to court when seeking an order that a company be put into Compulsory Liquidation.
This is where a director allows a company to continue trading when they knew or ought to have known that there was no reasonable prospect of the company avoiding an insolvent Liquidation or Administration. Directors have a duty to take all steps to minimise potential loss to the company’s creditors. In such circumstances the director can be held personally liable to contribute to the assets of the company.