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Glossary of Insolvency Terms

16th July, 2019
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Robert Moore

Written ByRobert Moore

Marketing Manager


+447584583884

Rob has over a decade of experience in web and general marketing. He has extensive knowledge of the Insolvency sector and has helped many worried directors with their questions.

Rob is now working with the Board at KSA Group Ltd to develop strategic marketing programmes to support the business plan and drive more company rescues.

Robert Moore

This business is full of jargon, so below is a glossary of the main terms we use throughout our site, to explain them in layman’s terms:

Administration – This is when a company is in financial difficulty and an administrator is called in to assess how viable the company is (that is, whether the company can survive). The administration may result in:

  • the company continuing as at present;
  • new owners being found to turn the company around; or
  • the company closing down and any assets being sold to pay off its debts.

Administrator – A licensed insolvency practitioner the court appoints to take control of a company when it goes into administration.

Annual General Meeting (AGM) – A yearly meeting where a company’s shareholders and directors raise any issues and the directors give information about the past year and their forecasts for the future. At an AGM, the shareholders and directors also vote on any changes that can be made at the meeting (for example, a change of auditors and directors).

Arrears – Arrears are debts and overdue amounts. If arrears are not paid off, the person or company the arrears are owed to can take legal action to recover the amount they are owed.

Asset – Something of value which a person or company owns and could sell to raise funds (for example, a house or stock).

Bankruptcy – An option a person can use if they cannot pay their debts when they fall due, or if they owe more than the value of their assets. If the person is declared bankrupt (after applying for bankruptcy themselves or creditors applying for them to be made bankrupt), an official receiver will take control of the person’s assets.

Creditor’s Petition – An application creditors can make to the court for their debtors (those who owe them money) to be made bankrupt.

Companies House – Companies House register all limited companies and public limited companies. They store information about companies and make it available to the public. Companies House also incorporate (form) and dissolve (break up) companies.

Company Voluntary Arrangement (CVA) – This is a debt solution for companies who cannot pay their debts. It allows a company to come to an arrangement to pay off a percentage of their debt over a period of time, to reduce cash-flow problems and take pressure off the directors. This allows the directors to focus on improving the business.

County Court Judgement (CCJ) – Creditors (those who are owed money) can apply for a county court judgement to recover a debt. If a county court judgement is made against you, the court will order the debtor (the person who owes the money) to pay the debt off within a set time.

Creditor – A company or person who is owed money for goods or services they have provided. In a company’s accounts, amounts owed to creditors are classed as liabilities.

Creditors’ Voluntary Liquidation (CVL) – A procedure where the directors of an insolvent company voluntarily choose to stop trading, sell all their assets, end all contracts and close down.

Credit Rating – This is an estimate of a person’s or company’s ability to pay off their debts. Banks and financial-service providers use credit ratings when deciding whether to provide credit. A person’s or company’s credit rating is based on repayments they have made (or filed to make) in the past and any court judgements.

Debtor – A company or person who owes money for services they have received but not yet paid for. In a company’s accounts, amounts owed by debtors are classed as assets.

Debtor’s petition – This is paperwork which a debtor provides to the county court to declare themselves bankrupt.

Department for Business, Energy and Industrial Strategy (BEIS) – A government agency that ‘works for everyone, so that there are great places in every part of the UK for people to work and for businesses to invest, innovate and grow’. It also helps in employment issues (such as redundancy).

BEIS replaced the Department for Business, Innovation and Skills (BIS) and the Department of Energy and Climate Change (DECC) in July 2016.

Directors – The people in a company who are responsible for running and managing it.

Director’s disqualification – When a person has been declared bankrupt or has committed certain insolvency offences, they become disqualified from acting as a director.  While the director is disqualified, it is illegal for them to act as a director or manage a company.

Dissolution – A legal process which breaks up a company that has not traded for at least three months.

Distraint – When a person’s property or possessions are seized to recover rent or other money they owe.

Domino effect – The knock-on effect a company or person who cannot pay their debts has on the companies and people they owe money to (their creditors). This may result in the creditors also becoming insolvent.

Factoring – A service where a financial-service provider ‘buys’ a company’s unpaid invoices, for less than the value of the invoices, and helps the company to collect the remaining amount for a fee.

Floating Charge – If a company borrows money, the bank or lender will take some security giving them a legal charge over (legal claim to) particular assets. There are essentially two types of legal charge – floating and fixed. A floating charge is less effective and more flexible than a fixed charge and is appropriate for assets which can change on a day-to-day basis (for example, stock).

Fixed Charge – This is a more rigid legal charge (legal claim) where a specific asset is held as security by a creditor. It is a more common charge (for example, security for a loan or interest payment).

Fraudulent Trading – Put simply, this is continuing to do business when there is no reasonable prospect of repaying debts, with the intention of defrauding creditors.

Going Concern – A company is a going concern if it is continuing to trade and can cover its costs and make money.

HM Revenue & Customs (HMRC) – The tax and customs authority that collects the taxes (for example, income tax and VAT) that pay for public services and state benefits.

Individual Voluntary Arrangement (IVA) – An agreement that a person (not a company) enters into with their creditors to pay off their personal debts over a set period of time. It is a formal debt solution approved by the court.

Insolvency Practitioner – A professional person (not a company) who is an expert in insolvency and is a member of and is licensed by the Insolvency Practitioners Association.

Insolvent – A term that is used when a company cannot pay or cover their debts (their liabilities) with the funds or assets they have (that is, their liabilities are greater than the value of the funds and assets they have).

Interim Order – When someone is applying for an IVA, they can ask the court for an interim order to prevent their creditors from taking legal or bankruptcy action against them while the arrangement is being agreed.

Investigating Accountant – An accountant appointed (usually by a lender) to look into a company’s accounts, forecasts, management and so on to identify the lender’s options for recovering a debt from the company. See our guide to Investigating accountants.

Joint and Several Liability – This is where two or more people are liable, together and separately, for paying off a debt. Creditors can first try to recover the debt from the person with the most assets, and then go on to the next and so on until all debts have been paid off or all liable people have been declared bankrupt.

Liability – Something that a person or company owes to another person or company.

Limited Company – A business that is seen as being legally separate from its directors and shareholders, meaning that they are not liable for any of the business’s actions. Limited companies are usually privately owned.

Limited Liability – A legal process that allows the shareholders of limited companies and public limited companies to limit their responsibilities. For example, so shareholders do not lose more than their investment in the business.

Liquidation  – A process for bringing a company to an end. An insolvency practitioner is appointed to act as the liquidator. They sell all the company’s assets and distribute the proceeds to creditors. Any remaining amount goes to shareholders. The company is then struck off the register at Companies House.

Liquidator – When a company is in liquidation, an insolvency practitioner is appointed to be the liquidator. They are responsible for selling the company’s assets and distributing the proceeds to creditors.

Moratorium – A period of time when a certain activity is not allowed or not necessary. A moratorium is often used to protect a company by postponing the payment of a debt.

No-fault Bankruptcy – A form of bankruptcy for people who have become bankrupt through no fault of their own, and there are no issues of fraud, misfeasance (performing a legal action in an improper way), recklessness and so on. A no-fault bankruptcy can be discharged (that is, end) within 12 months, rather than a number of years.

Nominee – A licensed insolvency practitioner who helps to negotiate a deal with creditors as part of a proposal for a company voluntary arrangement or individual voluntary arrangement. The nominee deals with legal issues and matters such as chairing meetings with creditors and checking the debtor’s accounts and forecasts.

Official Receiver – An official receiver is appointed by the court when a person or company is made bankrupt or goes into liquidation. The official receiver is a civil servant who works for the Insolvency Service and is also an officer of the court.

When the court gives notice of a bankruptcy or winding-up order, the official receiver manages the initial stages of the process, which involves collecting and protecting any assets and investigating the cause of the situation.

Partnership – A business with more than one owner (partners).

Partnership Voluntary Arrangement (PVA) – This is a debt solution for partnerships that cannot pay their debts. It allows the partners to come to an arrangement to pay off a percentage of their debt over a period of time.

Pay As You Earn (PAYE) – A system where employers take tax and National Insurance contributions from their employees’ wages and pay them to HM Revenue & Customs.

Pension Fund – A ‘pot’ of money that retirement benefits are paid from. The fund is built up from pension contributions.

Personal Guarantee – This is where the director or partner in a business personally guarantees to pay off a debt if the company or business fails to.

Public Limited Company (PLC) – A company that has limited liability and sells its shares on the stock exchange.

Receiver – A person appointed by a bank to collect debts owed to it by selling the debtor’s assets. They do not usually deal with debts owed to other creditors or shareholders.

Receivership – A company goes into receivership when an official receiver is appointed to sell the company’s assets in order to pay off debt. The company will usually be liquidated or sold.

Shareholder – A person who has bought shares in a company or owns a stake in a company. Shareholders have a say in how the company is run and receive a share of the profits, in the form of dividends.

Simultaneous Voluntary Arrangements – This mechanism links PVAs and IVAs, to protect the partnership and individual partners. It allows the partnership voluntary arrangement to deal with the partnership’s debts and individual voluntary arrangements to deal with the partners’ personal debts.

Small Firms Loan Guarantee Scheme (SFLGS) – A scheme where lenders can provide government-backed loans of between £5,000 and £250,000 to new and existing businesses. If the business fails, the lender can claim up to 75% of the loan back from the government.

Sole Trader – A business owner who is the only person responsible for the day-to-day running of the business and its debts.

Statement of Affairs – This is a summary of your financial affairs. It sets out what you own, the assets you have, your liabilities (debts) and your living expenses.

Statutory Demand –  An action that creditors usually take to get county court judgements against their debtors. It is the formal demand for an undisputed debt (over £5,000) to be paid within 21 days.  Failure to pay the debt in line with the demand can lead to winding-up or bankruptcy proceedings.

Supervisor – The person who collects and distributes payments made under voluntary arrangements (CVAs and IVAs).

Trading Out –  This is when a company continues to trade through tough times in order to put right any problems and help it grow.

Trustee – In bankruptcy, this is a person who holds property in trust for the bankrupt debtor’s creditors.

Turnaround Practitioner – An advisor who specializes in helping struggling companies to solve their problems and get back on their feet.

Turnover – The money that a business receives over a period of time for its goods or services.

Unique Selling Proposition (USP) – The thing (or things) that makes a company stand out from its competitors.

Value Added Tax (VAT) – A tax charged on goods and services and other ‘taxable supplies’. It is paid to HM Revenue & Customs.

Walking Possession – When a bailiff (for a county court) or sheriff (for the high court) enters a property and asks for payment of a proven debt. If the debt is not paid, they have the right to take possession of the goods, equipment, fixtures, stock and so on, on the premises.

Warrant– A document a legal authority or governing body issues before administrative actions (court action by debtors or others who want to put a firm into administration or get the assets of an insolvent firm) can take place. If a debtor does not keep to a county court judgement made against them, the creditor can apply to the court for a ‘warrant of execution’. A notice of the warrant will be issued to the debtor. If the debtor still does not pay off their debt, a court bailiff can be sent to collect the payment or seize goods.

Winding-up Petition – The paperwork used to apply to the court for a company to be closed down after they have continuously refused to pay their debts.

Wrongful Trading – When a director allows their company to continue to do business even though they know (or should know) that there was no prospect of the company paying its debts.

Summary

Most of the terms explained above are mentioned in more detail throughout this site. You can use the search bar above to find more detailed guides.

The explanations in this glossary are for general guidance only. We do not guarantee that they are correct in every circumstance.

We do not accept any potential or actual liability arising from you relying on any of the explanations in this glossary, or the guides on this site.

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What Is A Winding Up Petition By HMRC or Other Creditor

A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent.

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What Is A Winding Up Petition By HMRC or Other Creditor
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Notice of Intention To Appoint Administrators

A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.

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Notice of Intention To Appoint Administrators
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What Does Going Into Administration Mean?

Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners.  The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)Company rescue as a going concern – this is usually a  company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation.  This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required.  Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk.  So communication with the secured lender is essential.  

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What Does Going Into Administration Mean?

What is Receivership?

in What is …? What is receivership?

Understanding Receivership: Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control.  When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.

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What is Receivership?

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