Glossary of Terms

Corporate Insolvency Terms

Company Administration – a formal insolvency process that protects a company from creditor action while rescue or restructuring options are explored.

The objective is to save the company as a going concern or sell the business and assets to achieve a better return for creditors than liquidation.  If this is not possible assets are realised to pay preferential and secured creditors.

A pre-pack administration is where the sale of the business and assets is arranged before administration begins and is completed shortly after the administrator is appointed.

Administrative Receiver – A licensed insolvency practitioner appointed by the holder of a floating charge over the whole or substantially the whole of the company’s property.  An administrative received has wide powers including the power to carry on the business of the company and to see the business any other assets comprised in the security to repay the secured and the preferential creditors.  This is only available for floating charges created before 15 September 2003.

Administrator – is a licensed insolvency practitioner appointed to take control of a company in administration. They can be appointed by the directors, a qualifying floating charge holder or the court. Once appointed, directors lose control of the business.

Company Voluntary Arrangement (CVA) – a formal statutory agreement between a company and its creditors.  It allows the business to continue trading while repaying all or part of its debts over a fixed period. A CVA is supervised by a licensed insolvency practitioner acting as a Supervisor and requires 75% of creditors by value approval.  It is a legally binding deal with creditors.

Compulsory Liquidation – this occurs when the court orders a company to be wound up, usually following a winding-up petition from a creditor. The official receiver is usually appointed first, but creditors can later appoint their own insolvency practitioner as liquidator.

Creditors’ Voluntary Liquidation (CVL) – is a liquidation started voluntarily by directors and shareholders when a company is insolvent and can no longer trade.  A licensed insolvency practitioner acting as a Liquidator is appointed to close the company in an orderly manner and deal with creditors.

Liquidation – is the formal closure of a company.  A liquidator sells the company’s assets and distributes the proceeds to creditors in the statutory order of priority.  Once complete, the company is dissolved and ceases to exist.

Liquidator – is the licensed insolvency practitioner appointed to wind up a company, realise assets and distribute funds to creditors.

Personal Insolvency Terms

Bankruptcy – is a formal insolvency process for individuals who cannot pay their debts.  Control of assets vests (passes) to a trustee, most debts are written off, and the individual is subject to restrictions for the duration of the bankruptcy. It provides a clean financial break.

Debt Relief Orders (DROs) – are designed for individuals with low levels of debt and minimal assets.  Typically, it applies where debts are under £20,000 and assets are limited to around £1,000.  After twelve months, most qualifying debts are written off. DROs are not available in Scotland.

Debt Management Plans (DMP) – an informal repayment arrangement between an individual and their creditors to pay all debts.  It is not a formal insolvency process and does not provide legal protection from enforcement action.

Individual Voluntary Arrangements (IVA) – a formal statutory agreement allowing an individual to repay debts through one affordable monthly payment over a set period.  It is supervised by a licensed insolvency practitioner acting as a Supervisor.  Any remaining qualifying debt is written off at the end of the arrangement.

Trustee in Bankruptcy – a Trustee in Bankruptcy is a licensed insolvency practitioner appointed to manage a bankrupt person’s assets and distribute funds to creditors.

General Insolvency Terms

Annual Progress Report – a report insolvency practitioners must prepare, detailing actions taken and financial receipts and payments during the insolvency, provided annually or (in some procedures) every six months.

Arrears – debts that remain unpaid after their due date.

Assets – item of value owned by a business or individual, such as property, stock, machinery, goodwill or debtors.

Association of Business Recovery Professionals (R3) – the professional body for licensed insolvency practitioners.

Antecedent Transactions – transactions entered in breach of a fiduciary duty by a director prior to the onset of formal insolvency proceedings.  These can be undone or adjusted by the court.  The  main types of antecedent transactions are transactions at an undervalue, preferences and misfeasance.

Bankruptcy Petition – a bankruptcy petition is a formal court application usually filed by a creditor, to declare an individual bankrupt because they owe £5,000 or more and cannot pay.

Breach – legal-speak for break (a law, a promise etc): if you do so, you are said to be ‘in breach (of section XYZ)’ or just ‘in breach’.

Charge – in this context a claim on property or other assets that has to be met before other claims are considered.  A mortgage on your home is the commonest form of charge.

Claim – in this context an official form on which a creditor tells the court what they want (usually some money you owe them) and asks for a judgement in their favour.  Enforcement officers who may visit a debtor’s property to seize goods for unpaid debts, such as council tax, fines or court judgements.

County Court Judgement (CCJ) – a court order requiring payment of an unpaid debt within a set period; failure to comply can lead to enforcement action.

Companies House – the UK government public registry where all limited companies and LLPs are registered, storing details such as annual accounts and director information.

Credit Rating – a score used by lenders to assess the likelihood of an individual or business honouring debts.

Creditors’ Committee – a group of creditors (typically 3–5) representing the interests of all creditors in an insolvency, assisting and sometimes approving the practitioner’s fees.

Creditors’ Meetings – formal or informal meetings of creditors called by an insolvency practitioner to share information and obtain approvals during an insolvency procedure.

Debtor – an individual or company that owes money to a creditor.

Debt – a sum owed by a debtor to a creditor.

Department for Business, Innovation & Skills (DBIS) – The government department overseeing the Insolvency Service in England & Wales.

Debenture – the name for a written contract between a lender (typically a bank) and its customer for lending money and securing the debt on certain of the customer’s assets.

Directors – directors are legally responsible for managing a company.  When insolvency becomes likely, directors must prioritise the interest of creditors over shareholders. Failure to do so can result in personal liability.

Discharge – a release from certain debts following personal insolvency (bankruptcy or DRO).

Dissolution – the legal end of a company’s existence after it has ceased trading and been struck off the register.

Distrain – bluntly speaking to send in the bailiffs.  The dictionary says ‘seize the goods of the debtor’.  The noun – the act of distraining – is distraint.

Dividend – when all a company’s assets have been realised, the money is then distributed among all the creditors.  Each creditor receives a ‘dividend’, ie. For every £1 the creditor is owed, they might received 2 pence.  The dividend is therefore two pence in the pound.

Factoring – a financial service where a provider advances cash for unpaid invoices and collects repayment itself for a fee.

Fixed Charge & Floating Charge – a fixed charge secures a specific asset, such as property.  A floating charge covers changing business assets such as stock or invoices.  These determine which creditors are paid first in insolvency from which asset realisations.

Fraudulent Trading – fraudulent trading involves deliberately trading with the intention to defraud creditors. It is a serious offence and can lead to civil and criminal consequences.

Fiduciary duty – a duty to act in good faith and put the company’s interests before your own.

Going Concern – a business able to continue trading.

HMRC – Her Majesty’s Revenue & Customs — the UK tax authority.

Insolvency Act 1986 – the primary UK legal statute governing personal and corporate insolvency procedures.

Insolvency Practitioner (IP) – an individual authorised to act in insolvency matters either by a recognise professional body or by a relevant authority.

In specie – a distributions in specie is where tangible assets rather than cash are paid out by a liquidator by way of distributions or dividends.

Interim Order – a court protection for an individual applying for an IVA from creditor action during the application period.

Law of Property Act (LPA) Receivership – a process allowing a secured creditor to appoint a receiver, usually over property, to sell debtor assets to repay debt.

Liability – a debt or obligation owed, such as loans, hire purchase, or trade debt.

Lien – the right to retain possession of assets until a debt is paid.

Limited Company & Limited Liability – a business structure where shareholders’ liability is limited to their investment.

Liquidation – the process by which a company ceases to trade and has it assets collected in and distributed to satisfy its liabilities; the term winding up is also used.

Members’ Voluntary Liquidation (MVL) – a solvent liquidation to pay creditors in full and return surplus to shareholders, often tax-efficient.

Mitigate – to soften a blow or reduce the severity of something.  In the context of an insolvent business an employee with a valid claim can get their wages paid by the government but they cannot just take the money and run.  They must mitigate their claim by at least claiming unemployment benefit and attempting to get another job.

Moratorium – a temporary legal pause, during insolvency where creditor enforcement action is prohibited.

Nominee – a licensed insolvency practitioner named in a proposal to act in the preliminary stages of the implementation of a voluntary arrangement.

Office Holder – an insolvency practitioner appointed to conduct an insolvency process.

Official Receiver (OR) – a civil servant employed by the Insolvency Service who may act in insolvency proceedings such as the administration of compulsory liquidations and bankruptcies.

Partnership & Partnership Voluntary Arrangement (PVA) – a business owned by more than one person; a PVA is similar to a CVA but for partnerships.

PAYE – Pay As You Earn — UK tax deducted from wages and paid to HMRC by employers.

Personal Guarantee – a legal commitment making an individual personally liable for a debt incurred by another party (often a company).

Petition – an application to the court (in this context, asking for a company to be put into liquidation).  To petition means to apply; a petition means the application itself and the person who does the petitioning is called the petitioner.

PLC – Public Limited Company — a company able to issue shares to the public with a minimum share capital requirement.

Prescribed Part – in order to increase the chances of returns to creditors the Enterprise Act 2002 created the ‘Prescribed Part’.  This is a pot of money set aside from what would have been paid to floating charge creditors so that a repayment can be made to unsecured creditors instead.  The Prescribed Par is calculated as 50% of the first £10,000 due to be repaid to floating charge creditors and then 20% of floating charge creditor returns up to a total cap of £800,000.

Preference – a preference occurs when a creditor is paid in priority to others shortly before insolvency.  Such payments may be challenged and recovered.

Proof of Debt – a legal form creditors complete in insolvency to state how much they believe they are owed.

Provisional liquidator – a person appointed by the court to protect the assets of a company, after a winding up petition has been presented, but before the company is placed into liquidation.

Proxy – someone authorised to attend and vote at a creditors’ meeting on behalf of a creditor.

Qualifying Floating Charge Holder – a lender holding a floating charge with the legal right to appoint an administrator.

Realise – sell the assets of a company to raise money to pay the creditors.

Receiver – the general term applied to the person administering any type of receivership.

Receivership – receivership occurs when a secured creditor appoints a receiver to sell company assets to repay a debt.

Redundancy – statutory entitlement when employment ends due to business closure or restructuring.

Retention of Title (ROT) – a contractual right for a supplier to retain ownership of goods until payment is made in full.

Set-off – set-off is a common law remedy where two parties (either individuals or businesses) who are dealing with each other draw a line at a given point and one party pays the net amount in final settlement.  In insolvency, set-off is mandatory so, if you owe money to an insolvent company and it owes you money you only pay the net amount ie. The amount that is left after you have taken into account the money the insolvent company owes you. 

Shadow directors – somebody who, although not officially on the board of directors, still calls the shots.  The ‘real’ directors act on the shadow director’s advice and/or instructions.  The significance of this is that the shadow directors are caught by the same legislation as official directors if they get up to mischief in any way.  Professional advisers such as accountants or solicitors do not count as shadow directors.

A defacto director is somebody who acts like a director even thought they have not been officially appointed.

Shareholders – owners of a company who may receive dividends and have voting rights.

Sole Trader – a business owned and run by an individual who is personally liable for its debts.

Statement of Affairs – a formal summary document of a company’s or individual’s assets and liabilities.

Statutory demand – a formal demand (‘pay up or else’) for payment of a debt as the first stage of compulsory liquidation proceedings.

Supervisor – An insolvency practitioner who oversees a CVA or IVA.

Time to Pay Agreement (TTP) – an arrangement typically with HMRC allowing a debtor to repay tax debts in instalments.

The Insolvency Service (IS) – the UK government agency responsible for overseeing insolvency regulation.

Trading Out – continuing to trade through financial difficulty in an attempt to recover.

Transaction at an Undervalue – a transaction at an undervalue occurs when assets are transferred for significantly less than their true value before insolvency.  An insolvency practitioner can apply to reverse the transaction.

Turnaround Business Angels – investors willing to fund distressed businesses with potential.

Turnaround Interim Managers – managers brought in temporarily to help turn around a distressed business.

Turnaround Practitioner – an advisor specialising in helping struggling businesses recover.

Turnover – the total sales made by a business before VAT and expenses.

Unsecured creditor – the creditor at the back of the queue for payment.  The creditor does not hold any security (such as bricks and mortar) and will not get any money until the preferential debts and floating charge creditors have been paid.  Typically there is not much left for unsecured creditors who have no special property rights against the company.

Value Added Tax (VAT) – a tax applied to the sale of goods or services, collected by businesses and paid to HMRC.

Walking Possession – enforcement where a bailiff or sheriff can enter premises to take possession of goods for debt.

Wrongful Trading – wrongful trading occurs when directors continue trading despite knowing there is no reasonable prospect of paying debts. Directors may be held personally liable if creditor losses increase as a result.

Winding Up Petition – a court application made by a creditor seeking to force a company into compulsory liquidation.  It is one of the most serious forms of creditor enforcement.