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Glossary of Insolvency Terms
A process placing a company under the control of an insolvency practitioner and the protection of the court to achieve a specified statutory purpose. Its purpose is to save the company, or if that is not possible, to achieve a better result for creditors than in a liquidation, or if neither of those is possible, to realise property to enable funds to be distributed to secured or preferential creditors.
Administration orders include:
(1) a court order placing a company that is, or is likely to become, insolvent under the control of an administrator in order to achieve the purpose of administration, following a petition by the company, its directors, its liquidator or a creditor.
(2) the administration of the insolvent estate of a deceased debtor.
(3) county court process permitting an individual with modest debts to pay off by instalments; no licensed insolvency practitioner is involved.
An insolvency practitioner appointed by the holder of a floating charge covering the whole, or substantially the whole, of a company’s property. He may carry on the company’s business and sell the business and other assets comprised in the charge to repay the secured and preferential creditors. Often abbreviated to receiver.
An administrative receivership is the term for when a person is appointed as an administrative receiver. Sometimes abbreviated to receivership.
A licensed insolvency practitioner appointed to manage the affairs of a company in order to achieve the purpose of administration set out in the Insolvency Act 1986. The administrator will produce a plan, known as his proposals, for approval by the creditors to achieve this.
Associates include family members, relatives, partners and their relatives, employees, employers, trustees in certain trust relationships, and companies which an individual controls. Associates of companies can also include other companies under common control (see also connected persons).
An individual against whom a bankruptcy order has been made by the court. The order signifies that the individual is unable to pay his/her debts and deprives him/her of his/her property, which is then realised for distribution amongst his creditors.
The process of dealing with the estate of a bankrupt (See the term Bankrupt).
Insurance cover intended to protect the uncharged assets of an estate. This is needed by a person who acts as a licensed insolvency practitioner.
A sale involving the dismantling of a business. Trading ceases and the assets are sold off piecemeal.
A right given to a creditor to have a specified asset of the debtor appropriated to the discharge of the indebtedness, but not involving any transfer either of possession or ownership.
A court order placing restrictions on the disposal of certain assets, such as property or securities, given after judgement and gives priority of payment over other creditors.
Company Directors Disqualification Act 1986
An act concerning the disqualification of persons from being directors or otherwise concerned with a company’s affairs.
Company Voluntary Arrangement (CVA)
A voluntary arrangement for a company is a process whereby a plan of reorganisation or composition in satisfaction of its debts is put forward to creditors and shareholders. There is little involvement by the court and the scheme is under the control of a supervisor.
An agreement between a debtor and his creditors whereby the compounding creditors agree with the debtor and between themselves to accept from the debtor payment of less than the amounts due to them in full satisfaction of their claim.
A liquidation ordered by the court, usually as a result of a petition presented to the court by a creditor. This is the only method by which a creditor can bring about a liquidation of its debtor company.
Directors or shadow directors and their associates, and associates of a company.
Every person liable to contribute to the assets of a company in the event of it being wound up.
A person, not necessarily an insolvency practitioner, appointed to take charge of assets usually where they are subject to some legal dispute. This is not strictly an insolvency process, the procedure may be used other than for a limited company, e.g. to settle a partnership dispute.
A committee formed to represent the interests of all creditors in administrations, administrative receiverships and bankruptcies. The exact functions of the Committee depend on the type of procedure (cf Liquidation Committee).
Creditors’ Voluntary Liquidation (CVL)
This relates to an insolvent company and is commenced by resolution of the shareholders. The company is under the effective control of creditors, who can choose the liquidator.
A document which either acknowledges or creates a debt. The expression is commonly used to denote a document conferring a fixed and floating charge over all the assets and undertakings of a company.
The date of a meeting at which a decision is made or the date upon which a decision is made otherwise than at a meeting or is deemed to have been made.
A means by which a creditors' decision in insolvency proceedings is made. Includes both physical and virtual meetings, electronic voting and voting by correspondence.
A decision of creditors made in accordance with notice of the procedure unless sufficient objections are made to the decision being sought.
Disqualification of Directors
A director who has been found to have conducted the affairs of an insolvent company in an ‘unfit’ manner may be disqualified, on application to the court by the Secretary of State, from holding any management position in a company for between two and fifteen years. The Secretary of State may also accept an undertaking of similar effect given by such a director.
Extortionate Credit Transaction
A transaction by which credit is provided on terms that are exorbitant or grossly unfair compared with the risk accepted by the creditor. Such a transaction can be challenged by an administrator, a liquidator or a trustee in bankruptcy.
A form of security granted over pre-determined assets, preventing the debtor from dealing with those assets without the consent of the secured creditor. It grants the secured creditor a first claim on the proceeds of sale, and the creditor can usually appoint a receiver to realise the assets in the event of default.
A form of security granted to a creditor over general assets of a company which may change from time to time in the normal course of business (eg stock). The company may continue to use the assets in its business until an event of default occurs and the charge crystallises. If this happens, the secured creditor can realise the assets to recover his debt, typically by appointing an administrator, and obtain the net proceeds of sale subject to the prior claims of the preferential creditors.
A company which has carried on business with intent to defraud creditors, or for any fraudulent purpose. This is a criminal offence and those involved can be made personally liable for the company’s liabilities.
The basis on which insolvency practitioners prefer to sell a business. Effectively it means the business continues, jobs are saved, and a higher price is obtained.
A legal commitment to repay a debt if the original borrower fails to do so. Directors may give guarantees to banks in return for the bank giving finance to their companies.
Individual Voluntary Arrangement (IVA)
This is a procedure whereby a scheme of arrangement of an individual’s affairs or composition in satisfaction of his debts is put forward to creditors. Any scheme requires the approval of the court and is under the control of a supervisor.
This is defined as having insufficient assets to meet all debts, or being unable to pay debts as and when they are due. If a creditor can establish either test, he will be able to present a winding-up petition. For a bankruptcy petition, inability to pay is the only available ground.
Insolvency Act 1986
The Insolvency Act 1986 is the primary legislation governing insolvency law and practice. Nevertheless, many other statutes and statutory instruments are also relevant.
Insolvency Services Account
The Insolvency Services account is an account maintained at the Bank of England by the Insolvency Service (an Executive Agency of the Department for Business, Energy and Industrial Strategy) for handling funds in compulsory liquidations and bankruptcies.
A company goes into insolvent liquidation if its goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of liquidation.
Insolvent Partnerships Order 1994 (IPO)
The Insolvent Partnerships Order 1994 is 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 (IP)
See Licensed Insolvency Practitioner.
The Insolvency (England and Wales) Rules 2016 provide the detailed working procedures for the provisions of the Insolvency Act 1986.
An individual who intends to propose a voluntary arrangement to his creditors may apply to the court for an interim order which, if granted, precludes bankruptcy and other legal proceedings while the order is in force.
A judgment is:
1. recognition of a debt by a court
2. decision given by a court at the conclusion of a trial.
Law of Property Act 1925
The Law of Property Act 1925 governs transactions in law and property. Contains statutory powers of receivers appointed under a fixed charge.
Law of Property Act 1925 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. Common in the case of the failure of a property developer, whose borrowings will largely be secured on specific properties.
Licensed Insolvency Practitioner (IP)
A Licensed Insolvency Practitioner (IP) is a person licensed by one of the Chartered Accountancy bodies or the Insolvency Practitioners’ Association. The only person who may act as an office holder in an insolvency.
Lien is the right to retain possession of assets or documents until the settlement of a debt.
Liquidation is the process whereby a company has its assets realised and distributed to satisfy, insofar as it is able, its liabilities and to repay its shareholders. The term winding up is also used. Liquidation is usually a terminal process, followed by the dissolution of the company.
A liquidation committee is a committee which receives information from the liquidator and sanctions some of his actions. Usually consists entirely of creditors, but may also comprise shareholders (see Creditors’ Committee).
A liquidator is a licensed insolvency practitioner appointed to wind up a company.
Members’ Voluntary Liquidation (MVL)
A members’ voluntary liquidation is 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.
Misfeasance is a breach of duty in relation to the funds or property of a company by its directors or managers.
A formal breathing space to allow a company time to pursue a rescue plan with a view to it being rescued as a going concern. No legal action can be taken against a company subject to a moratorium without leave of the court. The moratorium is overseen by a monitor who must be a licensed insolvency practitioner.
A mortgage is a transfer of an interest in land or other property by way of security, upon the express or implied condition that the asset shall be reconveyed to the debtor when the sum secured has been paid.
A nominee is a licensed insolvency practitioner nominated in a proposal for an individual or company voluntary arrangement to act as supervisor of the arrangement.
An office holder is a liquidator, provisional liquidator, administrator, administrative receiver, supervisor of a voluntary arrangement, or trustee in bankruptcy.
Official Receiver (OR)
An official receiver (OR) is an officer of the court, civil servant, member of the Department for Business, Energy and Industrial Strategy and deals with bankruptcies and compulsory liquidations.
The term onerous property in the context of a liquidation or bankruptcy, applies to unprofitable contracts and to property that is unsaleable or not easily saleable or that might give rise to a continuing liability. Such property can be disclaimed by a liquidator or a trustee in bankruptcy.
Partnership Voluntary Arrangement
The term used informally to describe the company voluntary arrangement procedure as applied to partnerships under the provisions of The Insolvent Partnerships Order 1994.
A petition is a written application to the court for relief or remedy.
A meeting of creditors of contributories which are physically present together.
A preference is a payment or other transaction made by an insolvent company or individual which places the receiving creditor in a better position than they would have been otherwise. A liquidator, administrator or trustee in bankruptcy may recover sums which are found to be preferences, if the transactions took place within a period of either two years (where the creditor is a connected person) or six months (in other cases) of the insolvency.
Defined in Schedule 6 of The Insolvency Act 1986. They have priority when funds are distributed by a liquidator, administrator, administrative receiver or trustee in bankruptcy.
Proof of Debt
Proof of debt is a document submitted by a creditor to the licensed insolvency practitioner or Official Receiver giving evidence of the amount of the debt.
Provisional liquidator is the name usually given to a licensed insolvency practitioner appointed, to safeguard a company’s assets after presentation of a winding-up petition but before a winding-up order is made.
A proxy is a document by which a creditor authorises another person to represent him at a meeting of creditors. The proxy may be a general proxy, giving the proxy holder discretion as to how he votes, or a special proxy requiring him to vote as directed by the creditor. A body corporate can only be represented by a proxy.
A proxy holder is a person who attends a meeting on behalf of someone else.
A receiver is often used to describe an administrative receiver, who may be appointed by a secured creditor holding a floating charge over a company’s assets. More accurately, a receiver is 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.
A receivership is the general term applied when a person is appointed as a receiver or administrative receiver.
Recognised Professional Body (RPB)
A recognised professional body is an organisation recognised by the Secretary of State for Business, Energy and Industrial Strategy as being able to authorise its members to act as licensed insolvency practitioners.
A relevant date is the date by reference to which preferential claims are reckoned.
Reservation of Title (or Retention of Title)
Reservation of title (or retention of title) is a provision under a contract for the supply of goods which purports to reserve ownership of the goods with the supplier until the goods have been paid for.
An arrangement which binds creditors to a restructuring plan to assist a company struggling with debt to restructure itself may sanctioned by the Court if it is fair and equitable and in the interests of the company’s creditors to do so.
Scheme of Arrangement
A scheme of arrangement is a term normally used to describe a compromise or arrangement between a company and its creditors or members, which may involve a scheme for the reconstruction of the company. If a majority in number representing three fourths 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.
A secured creditor is a creditor with specific rights over some or all of a debtor’s assets. A secured creditor gets paid first out of the proceeds of sale of the security.
A security is a charge or mortgage over assets taken to secure payment of a debt. If the debt is not paid, the lender has a right to sell the charged assets. The commonest example is a mortgage over a property.
A shadow director is a person who is not formally appointed as a director, but in accordance with whose directions or instructions the directors of a company are accustomed to act. However, a person is not a shadow director merely because the directors act on advice given by him in a professional capacity.
A special manager is a person appointed by the court in a compulsory liquidation or bankruptcy to assist the liquidator, Official Receiver or trustee in managing the insolvent’s business. He does not need to be a licensed insolvency practitioner.
A statutory demand is a formal notice requiring payment of a debt within 21 days, in default of which bankruptcy or liquidation proceedings may be commenced without further notice. Cannot be used where the debt is disputed.
A supervisor is the licensed insolvency practitioner appointed by creditors to supervise the way in which an approved voluntary arrangement is put into effect.
Transaction at an Undervalue
A transaction at an undervalue can describe either a gift or a transaction in which the consideration received is significantly less than that given. In certain circumstances such a transaction can be challenged by an administrator, a liquidator or a trustee in bankruptcy.
Apart from its common usage (e.g. under the Trustee Act 1925), this is a term used for the appointment of a licensed insolvency practitioner appointed in a bankruptcy.
An unsecured creditor, strictly, is any creditor who does not hold security. More commonly used to refer to any ordinary creditor who has no preferential rights, although, in fact preferential creditors will almost always also have an element that is unsecured. In any event, they are the last in the queue, apart from shareholders.
VAT Bad Debt Relief
VAT bad debt relief is the relief obtained in respect of the VAT element of an unpaid debt. Relief is now available where debt is six months old at the relevant date.
A meeting of creditors or contributories which are not physically present together.
See Individual Voluntary Arrangement (IVA) and Company Voluntary Arrangement (CVA).
See creditors’ voluntary liquidation and members’ voluntary liquidation.
A winding-up order is an order made by the court for a company to be placed in compulsory liquidation.
A winding-up petition is a petition presented to the court seeking an order that a company be put into compulsory liquidation.
Wrongful trading is a term applied to companies in liquidation or administration were a director allowed the company to continue trading in circumstances where he should have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration. The directors involved may be made personally liable to make a contribution to the company’s assets.