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Insolvency Terms Defined

The following terminology often appears in insolvency matters. Below are definitions of common insolvency phrases. The definitions should not be taken as forming any legal guidance or advice and are provided for information purposes only.

Administration order

An order made in a county court to arrange and administer the payment of debts by an individual; or an order made by a court in respect of a company that appoints an administrator to take control of the company. A company can also be put into administration if a floating charge holder, or the directors or the company itself file the requisite notice at court.

Administrative receiver

The person appointed by the holder of a floating charge debenture over a company’s assets to collect in and realise the assets of that company and to repay the indebtedness to the debenture holder.

Administrative receivership

The process where an insolvency practitioner is appointed by a debenture holder (lender) to realise a company’s assets and pay preferential creditors and the debenture holder’s debt. The right of a debenture holder to appoint an administrative receiver has been restricted by the Enterprise Act 2002.

Administrator

An IP appointed by the court under an administration order or by a floating charge holder or by the company or its directors filing the requisite notice at court.

Agricultural Receivership

A special remedy to take control of the assets of a farmer under the Agricultural Credits Act 1928.

Annulment

Cancellation.

Assets

Anything that belongs to the debtor that may be used to pay his/her debts.

Associates

Associates of individuals include family members, relatives, partners and their relatives, employees, employers, trustees in certain trust relationships, and companies which the individual controls. Associates of companies include other companies under common control.

Bankrupt

Someone against whom a bankruptcy order has been made and who has not been discharged from bankruptcy.

Bankruptcy restrictions order or undertaking

A procedure will be introduced on 1 April 2004 whereby a bankrupt who has been dishonest or in some other way to blame for their bankruptcy may have a court order made against them or give an undertaking to the Secretary of State which will mean that bankruptcy restrictions continue to apply after discharge for a period of between two to fifteen years.

Bond

Insurance cover needed by a person who acts as an insolvency practitioner.

Charge

Security interest taken over property by a creditor to protect against non-payment of a debt (such as a mortgage).

Company Directors Disqualification Act 1986

An Act of Parliament about the disqualification of directors.

Compulsory liquidation

Winding up of a company after a petition to the court, usually by a creditor.

Company Voluntary Arrangement (CVA)

A voluntary agreement for a company is a procedure whereby a plan of reorganisation or composition in satisfaction of debts, is put forward to creditors and shareholders. There is limited involvement by the court and the scheme is under the control of a supervisor.

Connected Persons

Directors or shadow directors and their associates, and associates of the company.

Contributory

Every person liable to contribute to the assets of a company if it is wound up. In most cases this means shareholders who have not paid for their shares in full.

Composition

An agreement between debtor and his creditors whereby the compounding creditors agree with the debtor between themselves to accept from the debtor payment of less than the amounts due to them in full satisfaction of their claim.

Contributory

Shareholder, every person liable to contribute to the assets of a company in the event of it being wound up.

Court-Appointed Receiver

A person, not necessarily a licensed insolvency practitioner, appointed to take charge of assets usually where they are subject to some legal dispute. Not strictly an insolvency process, the procedure may be used other than for a limited company, e.g. to settle a partnership dispute.

Creditor

Someone owed money by a bankrupt or company.

Creditor’s Committee

A creditors’ committee is formed to represent the interests of all creditors in supervising the activities of an administrator or trustee in bankruptcy, or receiving reports from an administrative receiver.

Creditor’s Voluntary Liquidation (CVL)

Relates to an insolvent company. It is commenced by resolution of the shareholders, but is under the effective control of creditors, who can choose the liquidator, liquidation committee.

Debenture

A document in writing, usually under seal, issued as evidence of a debt or the granting of security for a loan of a fixed sum at interest (or both). The term is often used in relation to loans (usually from banks) secured by charges, including floating charges, over companies’ assets.

Deed of Arrangement

Method for an individual (not a company) to come to terms with creditors short of formal bankruptcy, it has now been almost completely replaced by Individual Voluntary Arrangements.

Director

A person who conducts the affairs of a company.

Disqualification

A procedure whereby a person has a court order made against them or gives an undertaking to the Secretary of State which makes it an offence for that person to be involved in the management or directorship of a company for the period specified in the order (unless leave has been granted by the court).

Dividend

Any sum distributed to unsecured creditors in an insolvency.

Extortionate Credit Transaction

An extortionate credit transaction is 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 may be challenged by an administrator, a liquidator or a trustee in bankruptcy.

Fixed charge

A charge held over specific assets. The debtor cannot sell the assets without the consent of the secured creditor or repaying the amount secured by the charge.

Floating charge

A charge held over general assets of a company. The assets may change (such as stock) and the company can use the assets without the consent of the secured creditor until the charge “crystallises” (becomes fixed). Crystallisation occurs on the appointment of an administrative receiver, on the presentation of a winding-up petition or as otherwise provided for in the document creating the charge.

Fraudulent trading

Where a company has carried on business with intent to defraud creditors, or for any fraudulent purpose. It is a criminal offence and those involved can be made personally liable for the company’s liabilities.

Going concern

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.

Guarantee

An agreement to pay a debt owed by a third party. It must be evidenced in writing for it to be enforceable.

Insolvency Practitioner

An authorised person who specialises in insolvency, usually an accountant or solicitor. They are authorised either by the Secretary of State or by one of a number of recognised professional bodies

Individual Voluntary Arrangement (IVA)

A voluntary arrangement for an individual is a procedure whereby the person comes to an arrangement with his creditors in how their debt will be discharged. Such a scheme requires the approval of the court and is under the control of a supervisor.

Insolvent

The state of not being able to pay one’s debts as they fall due or having an excess of liabilities over assets.

Insolvency Act 1986 (IA 1986)

Primary legislation governing insolvency law and practice. Nevertheless, many other statues and statutory instruments are also relevant.

Insolvent Liquidation

A company goes into insolvent liquidation if it goes into liquidation at a time when assets are insufficient for the payment of its debts and other liabilities and the expenses of liquidation.

Insolvency Practitioner (IP)

Person authorised by one of the chartered accountancy bodies, the Law Societies, The Insolvency Practitioners Association or the Department of Trade. The only person who may act as office holder in an insolvency proceeding.

Insolvency Rules

The Insolvency Rules 1986, as amended, provide the detailed working procedures for the provisions of the Insolvency Act 1986.

Insolvency Rules (IA 1986)

The Insolvency Rules 1986 (as amended) these Rules apply where the Act applies. Where the old Act continue to apply so do the Bankruptcy Rules 1952 and the Companies (Winding Up) Rules 1949. There are separate rules dealing with insolvent partnerships, insolvent deceased’s estates and deeds of arrangement.

Interim Order

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 whilst the order is in force.

Investors’ Compensation Scheme

A statutory scheme operated by the SIB (Securities and Investments Board) to give individual investors up to £48,000 protection if an authorised investment business collapses.

Judgement

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 (LPA)

Governs transactions in law and property. Contains statutory powers of receivers appointed under a fixed charge.

LPA Receiver

Law of Property Act 1925 receiver: 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 failure of a property developer, whose borrowings will largely be secured on specific properties.

Lien

Right to retain possession of assets or documents until settlement of a debt.

Liquidation (winding up)

Applies to companies or partnerships. It involves the realisation and distribution of the assets and usually the closing down of the business. There are three types of liquidation – compulsory, creditors’ voluntary and members’ voluntary.

Liquidation Committee

Committee of creditors who receive information from the liquidator and sanction some of his actions.

Liquidator

The Official Receiver or an insolvency practitioner appointed to administer the liquidation of a company or partnership.

Member (of a company)

A person who has agreed to be, and is registered as, a member, such as a shareholder of a limited company.

Members’ Voluntary Liquidation (MVL)

A solvent liquidation where the shareholders appoint the liquidator to realise assets and settle all the company’s debts in full within 12 months.

Misfeasance

Breach of duty in relation to the funds or property of a company by its directors or managers.

Mortgage

A transfer of an interest in land or other property by way of security, redeemable upon performing the condition of paying a given sum of money.

Nominee

An IP who carries out the preparatory work for a voluntary arrangement, before its implementation.

Officer (of a company)

A director, manager or secretary of a company.

Official Receiver

An officer of the court and civil servant employed by The Insolvency Service, who deals with bankruptcies and compulsory company liquidations.

Onerous Property

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.

Person

An individual or corporation.

Petition

A formal application made to a court.

Policyholders Protection Act 1975

An act which established Policyholders Protection Board to provide compensation to the public in the event of the liquidation of an insurance company. The Board will make payment in full of liabilities under certain policies of compulsory insurance and 90 per cent of liability to provide policyholders under other general and investment type policies. Compensation is restricted to individual policyholders or partnerships; corporate policyholders are not protected.

Preference

A payment or other transaction in the six month to two year period preceding a liquidation, administration or bankruptcy, which places a creditor or a person connected with the insolvent, respectively, in a better position than they would have been otherwise. A liquidator, administrator or trustee in bankruptcy may recover any sums which are found to be preferences.

Preferential creditor

A creditor who is entitled to receive certain payments in priority to floating charge holders and other unsecured creditors. These creditors include occupational pension schemes and employees.

Proof of debt

A statutory form completed by a creditor in a compulsory liquidation to state how much is claimed. The form is supplied by the Liquidator.

Proving

A creditor who claims is referred to as “proving” for his debt, and the document by which he seeks to establish his claim is his “proof”.

Provisional liquidator

OR/IP appointed to preserve a company’s assets pending the hearing of a winding up petition.

Proxy

Instead of attending a meeting, a person can appoint someone to go and vote in their place – a ‘proxy’.

Proxy form

Form that must be completed if a creditor wishes someone else to represent him or her at a creditors’ meeting and vote on his or her behalf.

Public examination

When a company is being wound up or in bankruptcy proceedings, the Official Receiver may at any time apply to the court to question the company’s director(s) or any other person who has taken part in the promotion, formation or management of the company or the bankrupt.

Realise

Realising an asset means selling it or disposing of it to raise money, for example to sell an insolvent’s assets and obtain the proceeds.

Receiver

The commonly used name for an administrative receiver. The term can also mean a person appointed by the court or with the power to receive the rents and profits of property. Receivers who are not administrative receivers do not need to be insolvency practitioners.

Receivership

A company in administrative receivership is often said to be “in receivership”.

Rescission

A procedure that cancels a winding-up order.

Release

The process by which the Official Receiver or an insolvency practitioner is discharged from the liabilities of office as trustee/liquidator or administrator.

Reservation Of Title OR Retention of Title Agreement (Romalpa)

An agreement for the sale of goods to a company, being an agreement;
(a) which does not constitute a charge on the goods, but
(b) under which, if the seller is not paid and the company is wound up, the seller will have priority over all other creditors of the company in respect to the goods or any property representing the goods.

Secretary of State

The Secretary of State for the Department of Trade and Industry

Secured creditor

A creditor who holds security, such as a mortgage, over a person’s assets for money owed. A secured creditor is likely to be paid first.

Security

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. Security documents can be very complex. The commonest example is a mortgage over a property.

Shadow director

A person who, without being formally appointed, gives instructions on which the directors of a company are accustomed to act.

Special Manager

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 an insolvency practitioner.

Statement of affairs

A document sworn under oath, completed by a bankrupt, company officer or director(s), stating the assets and giving details of debts and creditors.

Statutory Demand

A formal notice requiring payment of a debt exceeding £750 within 21 days, in default of which bankruptcy or liquidation proceedings may be commenced without further notice.

Supervisor

An IP appointed to supervise the carrying out of a company voluntary arrangement.

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.

Trustee

(a) Trustee in bankruptcy – the authorized insolvency practitioner appointed to deal with the estate of the bankrupt;
(b) Trustee under a deed of arrangement – the authorized insolvency practitioner appointed to deal with the estate of the person who entered into the deed.

UNCITRAL

United Nations Commission on International Trade Law.

Unsecured creditor

A creditor who does not hold security (such as a mortgage) for money owed. Some unsecured creditors may also be preferential creditors.

Undischarged Bankrupt

Someone against whom a bankruptcy order has been made and who has not been discharged from bankruptcy.

VAT Bad Debt Relief

The relief obtained in respect of the VAT element of an unpaid debt. Previously available only when the debtor became insolvent, relief is now available on any debt unpaid for more than 6 months.

Voluntary liquidation

A method of liquidation not involving the courts or the Official Receiver. There are 2 types of voluntary liquidation – members’ voluntary liquidation for solvent companies and creditors’ voluntary liquidation for insolvent companies.

Winding-up

(Or liquidation) – the procedure whereby the assets of a company (or partnership) are gathered in and realised, the liabilities met and the surplus, if any, distributed to members.

Winding up Petition

A winding-up petition is a petition presented to the court seeking an order that a company be put into compulsory liquidation.

Winding-up order

Order of a court, usually based on a creditor’s petition, for the compulsory winding up or liquidation of a company or partnership.

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