A glossary of insolvency terms.
An insolvency process in which an administrator is appointed to take control of the affairs of an insolvent company.
The objectives of the administration are to either;
A practitioner appointed by a Qualifying Floating Charge Holder (“QFCH”) whose security was granted before 15 September 2003.
The Administrative Receiver is responsible for realising the assets of the company for the benefit of the charge holder.
Term used to refer to transactions that are subject to review by an officeholder. These transactions took place at a time of insolvency or may have caused insolvency. These transactions may give rise to claims that an officeholder can pursue.
If a bankruptcy order is made and it either ought not to have been made or the debts in the bankruptcy have been settled in full, an annulment can be applied for.
This is an application to cancel the existence of the bankruptcy and restore the position of both the debtor and their creditors to what it was prior to the order having been made.
Property of an individual or company which are capable of being realised for a value.
A legal process to deal with the affairs of an individual who cannot pay their debts.
An individual can apply to make themselves bankrupt or, if they owe over £5,000, one of their creditors can apply to make them bankrupt.
Once bankrupt, a Trustee will be appointed over the individual’s estate and will manage the financial affairs of the individual, with a view to realising any assets in order to pay the debts.
Following completion of the process, the bankrupt will be discharged from their liabilities.
The person or company that are owed the money.
A creditor who has security in respect of their debt. An example of this would be a mortgage company because they have the property as a means of security.
Charged assets can be classified as “floating” or “fixed”.
Fixed charge
Means the lender has security over the asset and that the rights to the asset vest with them until such times to indebtedness is repaid. The example above, over a property, would be categorised as a fixed charge.
Floating charge
Assets subject to a floating charge are assets that tend to witness movements such as cash, stock and debtors. These assets are often used by the company in the normal course of trade and hence the security is attached to the asset class.
A category of creditor who is paid in preference to the general body of creditors.
They are attributed preferential status in accordance with the Insolvency Act 1986.
Examples are employees for wages and arrears of holiday. They are paid first from funds available for distribution.
An agreement proposed by a company to its creditors, whereby the creditors are offered a sum in repayment of their debt.
The proposal is drafted to detail the exact terms on which repayment is made and will state how long the CVA will be in force, what happens if the terms are not adhered to and how the money to pay the creditors will be raised.
The creditors are entitled to vote upon the proposal and if the relevant threshold is met, the CVA is approved and creditors are bound by its terms.
The company continues to trade during the course of the CVA, under the control of the directors.
A process instigated by the directors of a company when the company no longer has the funds to continue to trade and the debts are not capable of being paid.
The process is agreed by the shareholders and then finally by the creditors.
A liquidator then takes control of the company. The director’s roles cease and the company is managed to closure, with the debts being written off if there are no funds realised to enable a distribution.
Enforced liquidation proceedings established by the Court.
A creditor will start the process by issuing a winding up petition.
The court will decide on the petition and if deemed appropriate the company will be placed into compulsory liquidation.
This is different to voluntary liquidation which is driven by the decisions of the directors and shareholders.
Company Directors Disqualification Act 1986
UK Company law that defines the basis on which directors of insolvent companies may be disqualified from acting in that capacity.
Directors can be disqualified if they are deemed to be unfit to act in that capacity because of their previous conduct.
Examples of such conduct include, but are not limited to; failure to maintain accurate records; continued failure to pay tax, misappropriating company assets, failing to comply with requests for information by the officeholder, placing orders whilst knowing that they cannot be paid for and committing fraud.
Disqualification periods can be up to 15 years in length.
A means by which creditors are asked to collectively vote upon a resolution proposed in respect of an insolvency appointment.
Examples include a virtual meeting or vote by correspondence.
A sworn statement by the directors of a company in which the state that having undertaken a thorough review of the affairs of the company, they are satisfied that the company is able to discharge all of its liabilities.
This document is used in an MVL (see later) to illustrate that the company is solvent and hence can be subject to a solvent liquidation.
A document prepared to reconcile what happened between the last accounts and the statement of affairs, in terms of a company’s financial affairs.
It is a best estimate of the final periods trading loss or profit.
An appointed agent of the company who is responsible for managing the affairs of the company, on behalf of the shareholders.
The process through which a limited company is removed from the register of companies at Companies House, meaning it no longer exists.
In an insolvency situation, after the settlement of costs, on occasion there may be a balance of funds held.
The duly appointed officeholder is responsible for distributing these funds amongst the creditors by way of a dividend.
The dividend is based upon the total value of proven creditor claims and the funds available expressed as a pence in the £.
A situation in which a company continues to trade with no intention of
paying off their debts, with the directors knowingly allowing this to happen.
A position of being unable to pay the amount owed to a creditor or creditors by virtue of insufficient assets to cover liabilities.
Balance Sheet Test
If the assets of a company are insufficient to cover the liabilities, then the company is considered to be insolvent on a balance sheet basis.
Cash Flow Test
An inability to pay debts either now or in the “reasonably near future” which is established by looking at the cash flow of a business.
A suitably qualified professional who holds the requisite qualifications to act in the capacity of an officeholder.
This person will hold a license, will be insured by way of a bond and will be authorised by a regulatory body such as the Insolvency Practitioners Association (“IPA”).
Insolvency Act 1986
The legislation that governs the insolvency in the UK.
Insolvency (England and Wales) Rules 2016
In conjunction with the Insolvency Act, the rules define the requirements for implementing the legislation governed by the Act.
Similar to a CVA (see above).
An individual can seek to agree a repayment plan with their creditors.
An online record of bankruptcy, IVA and debt management solutions which can be searched.
Law of Property Act 1925 gives the right to appoint a Receiver to the holder of a fixed charge or mortgage.
The LPA Receiver is not required to be a licensed insolvency practitioner but will be duly experienced and authorised.
The LPA Receiver is required to act an agent in managing the property or the sale of it, if required.
Is known as a solvent liquidation.
An MVL is a means of bringing the company to an end and is a legal process for doing so which does not require the company to be in financial distress.
In very broad terms, it is often cited as being a tax efficient means of bringing a company’s affairs to a close.
The legal terminology for a suspension of pending actions.
In an insolvency situation, it would be a period of time during which no actions can be taken by creditors.
When a proposal for a voluntary arrangement is drafted, a suitably qualified practitioner is asked to act as nominee.
In that capacity, they are required to review the proposal and give their assessment of its fairness and feasibility.
The nominee will prepare a report which advises what information they have reviewed, alongside the proposal to make their assessment.
Once an IVA or CVA is approved, a supervisor is responsible for ensuring that the terms of the proposal are adhered to.
The supervisor will be required to oversee the successful implementation of the arrangement and in the event that the arrangement is not progressing according to the proposal, the supervisor will have responsibility for either failing the arrangement or seeking to resolve the issues.
The supervisor reports to the creditors on the progress.
When a company is wound up by the Court or a person is declared bankrupt, the Official Receiver as an Officer of the court, is responsible for dealing with the initial administration.
This may include, making decisions with regards to asset realisations, as well as, investigating and making enquires of the circumstances leading up to their appointment. For example, a bankrupt will be interviewed by the Official Receiver.
A means of running a business whereby responsibility is shared between parties (partners) as are the profits and liabilities.
Common types of partnership are those of limited liability (“LLP”), whereby there are express limits to the liabilities a partner is responsible for, as determined by the partnership agreement.
A sale of a company and/or its assets.
The terms of the sale are agreed and on the appointment of the administrator, the sale is completed.
A standard form for creditors to complete in order to provide details of the amounts owed to them, which forms their claim in the insolvency proceedings.
An authority granted to allow another person to cast a vote on your behalf.
A report prepared in accordance with the statutory deadlines to creditors, which provides an analysis of monies received and items paid. It also provides details on case progression, planned future actions and the estimated dividends, if applicable.
A means of terminating the employment by an employer.
Commonly in insolvent situations, an employer may no longer be in a position to trade and with the business closing down, the staff will no longer be required.
As a result, the employer will make those staff redundant. Statutory redundancy pay is an entitlement if you’re an employee and you’ve been working for your current employer for over 2 years.
A clause that allows a seller to retain title of goods until they are paid for in full.
To be enforceable, the contract terms have to be clear, the item supplied has to be clearly identifiable and the item supplied must not have been “incorporated” into another.
Refers to the way in which an officeholder is paid for the work they do.
Approval has to be obtained before remuneration can be drawn by an insolvency practitioner and they have to supply those responsible for granting approval, details of how their time is charged.
The owner of shares in a company.
The shareholder will have rights attached to their shares, such as rights to vote, rights to receive dividends etc.
Owning over 75% of the issued shares is often referred to as a “controlling interest”.
A person who makes decisions and controls a company whilst not formally being registered as a director.
A document that details the assets and liabilities of a company. A director is responsible for signing the Statement of Affairs to confirm that the information contained therein is correct to the best of their knowledge.
A notice served on the debtor as a formal demand to make payment or face legal proceedings, in respect of a debt exceeding £750.
A self-employed individual carrying on business, who is responsible for the business in their sole capacity and who is not protected by limited liability.
The appointed insolvency practitioner responsible for managing the bankruptcy of an individual and ensuring that the bankruptcy estate is correctly administered.
The Taking Control of Goods Regulations 2013 detail the process and procedures which govern the notice of entry and subsequent entry into a debtor’s premises to seize goods, with a view to removing and selling them to generate funds.
An application to Court to have a company wound up and a liquidator appointed to realise the assets and investigate the affairs of the company and its directors.
This applies to a business which, despite being insolvent, continues to trade. This is usually because the business owner believes that things will get better, and although this is a misguided view, it is not considered to be fraudulent.
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