Glossary of Terms
We will start at the beginning with the most common insolvency related terms and the remainder follow on alphabetically.
Insolvency
This is where an individual or company cannot pay the debts they owe when they are due and/or the individual or company owes more than they own. People or companies in this situation can end up in a formal insolvency procedure (‘an insolvency’). Formal insolvency procedures are legal procedures designed to get debts repaid and to return individuals and, where possible, businesses to financial health.
Creditors and debtors
Creditors are the businesses or individuals who are owed money by others. Businesses or individuals that owe money are debtors.
Licensed insolvency practitioners and Official Receivers
Insolvency practitioners are the licensed independent specialists who are appointed to supervise formal insolvency procedures. Insolvency practitioners have to act in the interest of creditors. They can either help the debtor turn their finances around or when this is not possible they will gather in all the debtor’s assets, turn them into cash and distribute the proceeds back to creditors (in accordance with an order of priority determined by the Government).
Licensed insolvency practitioners are specially qualified and regulated accountants and lawyers; the Official Receivers are civil servants and employees of the government. Depending on the type of insolvency you’re involved in, you might come across both. You can read more here.
It is important to remember that where an individual or company has become insolvent, it is very likely that they will not have enough money to pay back all that is owed. Insolvency practitioners and Official Receivers will do their best to ensure that as much as possible is repaid. Once formally appointed to look after an insolvent company or individual, the insolvency practitioners, Official Receivers may be referred to as ‘Office Holders’.
Corporate insolvency
Administration (these involve an insolvency practitioner - referred to as an 'administrator')
An administration is an insolvency process where the objective is to rehabilitate the Company or sell the business and assets for the benefit of creditors as a whole. Failing that all of its assets are sold to pay preferential and secured creditors. Administrations are handled by an insolvency practitioner who will try and work out the best way to get creditors as much of their money back as possible. You might also hear the term ‘pre-pack’ administration. Pre-packs are where the sale of all or parts of a business is arranged before it enters administration. The sale is completed shortly after an administrator is appointed.
Administrator
A Licensed Insolvency Practitioner appointed when a firm goes into Administration. An Administrator has full control over the business and is either appointed by the directors, a qualifying floating charge holder or the Court.
Company Voluntary Arrangement ("CVA") (overseen by an insolvency practitioner - referred to as a 'supervisor')
Often used where a company is edging towards an insolvent position and is struggling to pay its debts. A CVA may be used to set up a deal between the company and its creditors where all or a percentage of the debt is paid over a period of time to ease cashflow. This procedure is supervised by an Insolvency Practitioner.
Compulsory liquidation
Liquidation of a company ordered by the Court as a result of a petition presented by the creditor. The Official Receiver is usually appointed in the first place but creditors can then appoint their own choice of insolvency practitioner should they wish to.
Creditors' voluntary liquidation
Liquidation of a company initiated by the directors/shareholders handled by a Licensed Insolvency Practitioner.
Liquidation
To wind up a company which is administered by a liquidator who realises all assets and distributes the proceeds to creditors and any surplus to shareholders. Liquidation is to companies what bankruptcy is to individuals. The company is dissolved once the process is complete.
Liquidator
A name given to a person who is responsible for dealing with the winding up of a company. A liquidator must be a Licensed Insolvency Practitioner.
Personal insolvency
Bankruptcy (managed by an Official Receiver or insolvency practitioner also known as 'trustees' when involved in a bankruptcy).
An option that can be used by individuals who cannot pay their debts as and when they fall due or they owe more than they own. Entering into bankruptcy will cause you to lose control of your assets and you cannot be a company director for the period of bankruptcy. However, it clears all your debts and gives you a fresh start.
Debt relief orders ('DRO') (managed by the Official Receiver)
DROs are those with relatively low debts (under £20,000) and few or no assets (maximum of £1,000) i.e. those who are unlikely to be able to repay even a portion of their debt. The debtor is debt free (excluding student loans, child support payments and fines and debts incurred through fraud) after one year.DROs do not apply in Scotland.
Debt management plans ('DMP') (mostly handled by debt management companies or debt charities - not insolvency practitioners or Official Receivers)
A DMP is an agreement between an individual and his/her creditors to pay all their debts.
Individual voluntary arrangements ('IVA') (overseen by an insolvency practitioner - referred to as a 'supervisor'). Used by individuals who are struggling to manage their finances and pay their debts. All outstanding debts are consolidated into a single, affordable monthly payment which is repaid to creditors. Any unpaid creditors are written off at the end of the IVA term.
Trustee in Bankruptcy
A licensed IP who holds the property of the bankrupt in trust for creditors.
Terms you are likely to hear during insolvency
Annual Report
Insolvency practitioners are obliged to produce regular reports detailing their actions, including an account of what money they have received from insolvent companies and individuals and what has been paid out to creditors or as expenses to pay for the insolvency procedure (you might see this referred to as a receipts and payments account). In most forms of insolvency procedure, an annual report has to be provided within one month of the anniversary of the appointment of the insolvency practitioner or Official Receiver. In some insolvency procedures (including administrations in England and Wales), a report is required every six months.
Arrears
A term used when you have not paid invoices/made payments on debts and they fall due. If you do not pay the debt holder may take action to claim the money back.
Assets
An asset is something which you own that holds value ie a house, stock, plant & machinery, goodwill and book debtors.
Association of Business Recovery Professionals
R3 - the body for Licensed Insolvency Practitioners.
Bailiffs
A bailiff (enforcement officer) may visit your business premises or home if you do not pay your debts - such as Council Tax bills, parking fines, court fines and county court or family court judgements.
County Court Judgement ("CCJ")
A CCJ can be made against you by a creditor (company or individual) in circumstances where you have failed to pay a debt. The Court will order you to pay the debt within an allocated time and if you don't the creditor will be able to take enforcement action such as instructing bailiffs.
Companies House
This is where all limited liability companies and limited liability partnerships are registered. They store all the information like accounts and details of directors and shareholders which are readily available for review by the general public.
Credit rating
A tool used by banks and financial service providers to assess how likely you are to be able to honour your debts. Every individual has their own credit rating which determines the amount of credit that will be available to you.
Creditors
A company or individual that owes money for goods and services provided.
Creditors’ Committee
The creditors’ committee is a small group of creditors (usually between 3 and 5) who volunteer to represent the interests of all creditors in an insolvency. The exact role of a committee depends on the insolvency procedure (liquidation, administration etc.) but typically the creditors’ committee acts as a sounding board for the insolvency practitioner. They can also be asked to approve the fees and expenses of the insolvency practitioner on behalf of the wider creditor group. Creditors’ committees are not a feature of all types of insolvency procedure.
Creditors’ meetings
These are formal or informal meetings of all creditors that are called by an insolvency practitioner handling an insolvency. A meeting is usually called at the outset of an insolvency proceeding and periodically thereafter. The purpose of the meeting depends on the type of insolvency, but it may be to impart information on the progress of the insolvency, to approve certain proposed actions by the insolvency practitioner or to approve fees and expenses. At the first such meeting there is usually an opportunity for creditors to ask the debtor (either an individual or an insolvent company’s directors) questions. It is very important to attend a creditors’ meeting if you are invited. If you cannot attend, you are allowed to send a 'proxy' in your place.
Debtor
An individual or company who owes money.
Debt
A sum owed by A (the debtor) to B (the creditor).
Debtor
A company which or individual who owes money for goods and services but not yet paid for. Classed as a current asset.
Department of Business, Innovation & Skills ("DBIS")
This has replaced the DTI. It is a Government department which runs the Insolvency Service in England & Wales.
Directors
The decision makers of the company. The directors control the business and are responsible for its successful running and management. They are protected from liability for a company's creditors if they act properly.
Discharge
A release of individuals subject to a bankruptcy or a Debt Relief Order from certain types of their debts.
Dissolution
A process that legally brings a company existence to an end. In order to start the dissolution the company must have ceased trading for three months.
Factoring
A serviced provided by financial institutions which pay for unpaid invoices in advance and get repaid from collecting debts for a fee.
Fixed charge
A form of security over specific assets such as freehold property. A fixed charge stops the debtor dealing with (eg selling) those assets without the creditor's consent.
Floating charge
A charge over 'floating' assets such as stock which is subject to change on a day to day basis. Individual items move into and out of the charge as they are brought and sold in the ordinary course of events.
Fraudulent trading
This occurs when director(s) continue to trade with the intention of defrauding creditors.
Going concern
A company which can continue to trade.
Her Majesty's Revenue & Customers ("HMRC")
The Government body which manages the collection of tax.
Insolvency Act 1986
The Insolvency Act 1986 provides the legal framework for all matters relating to personal and corporate insolvency in the UK.
Interim order
An individual who is in the process of applying for an individual voluntary arrangement ("IVA) can ask the Court to protect them from legal or bankruptcy action taken by creditors.
Liability
A sum that you owe, a loan, vehicle hire purchase agreement, trade creditor or a store card.
Lien
Lien is the right to retain possession of assets or documents until the settlement of a debt.
Limited company
An entity set up so that shareholders are not liable for any of its actions.
Limited liability
A legal concept that allows a limited company's shareholders to limit their liability if the business falls into difficulties where shareholders will lose no more than their investment in the business should it default.
Law of Property Act Receivership ("LPA")
The UK Law of Property Act passed in 1925 is a statute that contains provisions that give a secured creditor the right to appoint a receiver over the property of a debtor.
Members' voluntary liquidation ("MVL")
A solvent liquidation to pay creditors in full within 12 months and give the shareholder's money back. It is often a tax efficient way to pay shareholders.
Moratorium
A period of time where enforcement action is prohibited.
Nominee
A licensed insolvency practitioner ("IP") who manages the process of of a CVA/IVA.
Office holder
An insolvency practitioner appointed to conduct an insolvency process.
Official Receiver ("OR")
A civil servant employment by The Insolvency Service ("IS")
Partnership
Similar to a sole trader but where there is more than one owner.
Partnership voluntary arrangement ("PVA")
Same process as a CVA but used for partnerships.
Pay as your Earn ("PAYE")
A Government scheme where your tax is deducted from your wages and paid to the Government by your employer.
Personal guarantee ("PG")
A contract to make an individual liable for a debt incurred by a company or third party.
PLC
A company that is able to issue shares to the public. The minimum share capital level is £50,000.
Proof of debt
A legal form completed by a creditor in a bankruptcy (known as sequestrations in Scotland), liquidations, voluntary arrangements, and administrations to state how much they believe they are owed. You will usually be asked by the insolvency practitioner, Official Receiver, or AiB to provide any supporting evidence you have for your claim – copy invoices, delivery notes, statements, etc. It is helpful to provide this a quickly as possible. You might see this referred to as a ‘Statement of Claim’ form in a voluntary arrangement or a Scottish insolvency.
Proxy
A person or company can appoint someone to go to a creditors' meeting and vote in their place – a proxy. This can be the chairman of the meeting. A 'proxy form' will need to be completed if a creditor wishes this to happen – if you need a proxy form and haven’t already been given one, you should speak to the Office Holder handling the insolvency in which you’re a creditor. Several insolvency firms offer 'creditor services' including attending creditors’ meetings on clients’ behalves.
Receivership
If a company defaults on a loan or payment a secured creditor can appoint a receiver to go into the company to sell the company's assets in order to pay back some or all of the debt.
Redundancy
A statutory entitlement when a contract of employment is terminated which is guaranteed by the Government.
Retention of Title ('ROT')
Retention of Title is where you, as a creditor, have an agreement with a customer that says the goods you have supplied remain your property until the customer has paid for them. If you have a Retention of Title claim to make, you need to let the insolvency practitioner or Official Receiver know as soon as possible and provide them with a copy of your terms and conditions as well as the details of your claim.
Shareholders
Are the owners of a company. They have a say in how the business is run and get dividends from profits.
Sole trader
An owner of a business who is wholly responsible for the day to day running of the business and its debts. They are generally small firms with few employees.
Statement of Affairs
This is a summary of assets and liabilities.
Statutory demand
A formal demand for payment of an unpaid disputed debt over 35,000 for individuals or £750 for companies - the debt must be paid within 21 days of the demand being issued. Failure to pay a statutory demand can lead to a winding up or bankruptcy petition being issued.
Supervisor
The supervisor oversees CVA/IVA and is a licensed insolvency practitioner.
Time to pay agreement ("TTP")
A TTP allows for your debt to be paid back in instalments.
The Insolvency Service ("IS")
A Government agency that oversees insolvency regulators.
Trading out
A phrase used where a business continues to trade through tough times.
Transaction at an undervalue
A gift or transfer of an asset for less than its worth made after an individual or company is insolvent. An IP can apply to Court to have such a transaction reversed.
Turnaround business angels
Investors willing to fund distressed businesses.
Turnaround interim managers
Business managers able to run a distressed business for a short period to turn it around.
Turnaround practitioner
A professional advisor who specialises in helping struggling businesses to get back on track.
Turnover
The value of sales made by a business before VAT.
Value Added Tax ("VAT")
A tax that is paid as a percentage of the selling price. This is collected by the company and paid to HMRC.
Walking possession
A bailiff (for the County Court) or Sheriff (for the High Court) is able to enter your premises and take possession of goods, fixtures, equipment etc if you have failed to make payment of a judgement debt.
Wrongful trading
A director can be held accountable for wrongful trading in circumstances where they have allowed the business to continue trading knowing there is no prospect of being able to repay its debts.
Winding up petition
A creditor is able to present a petition to the courts in order to have the company wound up.
