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Glossary of Insolvency Terms

16 July 2019

Glossary of Insolvency Terms

For your benefit, here is a glossary of the main terms we use throughout our site. We are aware that this business is full of its own jargon, so here we explain in layman’s terms.

Please let us know if you come across any other terms we have missed, and we will be sure to explain the meaning clearly to you. 

Administration When a company falls into financial difficulties. An administrator is called in to assess the company’s viability. Either the company can continue, new owners can be found to turn the company around, or the company will be closed so that any assets can be sold to cover its financial responsibilities.

Administrator A person, a licensed insolvency practitioner, who overriding control of the company when a firm goes into administration. He or she is appointed by the court.

Annual General Meeting A yearly meeting, where shareholders and directors voice any issues and the directors give information regarding the past year and forecasts for the future. They also vote on any changes that are eligible to be made within the meeting, i.e. change of auditors and directors.

Arrears A term used when you have not paid invoices or debts. If you do not pay, the debt holder may take action to claim the money back.

Asset Something which you own that holds value should you come to sell it, i.e. a house or stock etc

Bankruptcy An option that can be used if a person cannot pay their debts as and when they fall due, or if they owe more than they own. Bankruptcy causes the debtor to lose control of their assets and can adversely affect their credit rating.

Companies House This is where ALL Ltd and PLCs are registered. Here all information is stored and made available to the public i.e. accounts, directors. Companies House also act to incorporate and dissolve companies.

County Court Judgement (CCJ) A court action by which a company/person will take you to court because you have not paid a debt. The court will order you to pay the debt within an allotted time, the consequence being further action from the company.

Creditors A company or person who owes money to another company for services provided. Creditors are classed as liabilities (as it is money outstanding).

Creditors Petition Creditors can petition for a debtor to be made bankrupt if an individual creditor (or when creditors merge) is owed more than £750. Creditors can only ask for someone to be made bankrupt if: the debt is unsecured; and for a fixed sum which the debtor appears unable to pay.

Credit Rating A tool that banks and financial service providers use to assess how likely you are to be able to honor your debt. Having a good rating gives you access to greater funds than if you have a poor rating.  Your rating is assessed on whether you have defaulted before or have had any court judgements.

Company Voluntary Arrangement (CVA) An insolvency mechanism for a struggling company. A deal may be set up, for a percentage of the debt to be paid over a period of time, to ease current cash flow problems and pressure on the directors. This allows the directors to focus on improving the business.

Creditors Voluntary Liquidation (CVL) When shareholders of the company initiate the company to cease trading, sell all their assets and terminate all contracts.  

Debtors A company or persons who owe you money for services you have provided, but not yet paid for. Classed as a current asset.

Debtors Petition A debtor petitions to the county court, to make themselves bankrupt.

Department of Business Innovation and Skills (DBIS) The Government agency which acts in the interests of all and aspires for higher productivity in all industries by promoting enterprise, innovation and creativity. They also help in employment issues i.e. redundancy.

Directors The decision makers of the company. They control the business and are responsible for its successful running and management.

Directors Disqualification When a person declares bankruptcy or has committed certain insolvency offences, they become barred from acting as a director.  For the period of the disqualification, it is illegal for them to act as the director or manage of the company.

Dissolution A legal process which breaks up a company who no longer wishes to trade. For this process, the company must have ceased trading for 3 months.

Distraint This is the seizure of someone’s property or possessions, in order to obtain payment of rent or other money owed.

Domino effect – When a company or individual has an insolvency problem and is being pursued by creditors, it is possible for companies and individuals linked, to also become insolvent.

Factoring A service provided by financial institutions, who pay the company for unpaid invoices and help collect the remaining funds for a fee.

Fixed and Floating Charges - A mortgage, debenture or other security documentation, is likely to create charges over particular assets to act as security for borrowings or other indebtedness. There are essentially two types of charge, floating and fixed. A floating charge is the less effective and more flexible of the two, which is appropriate to assets and material which is subject to change on a day to day basis i.e. stock. The floating charge crystallizes if there is a default or similar event.

Fraudulent Trading Put simply, this is the continuation of trading with no reasonable prospect of repaying debts and with the intentions of defrauding creditors.

Going Concern Where the company continues to trade for the current period and can cover its costs and make money.

Her Majesty’s Revenue and Customs (HMRC) The government body who collect and regulate PAYE, NIC, VAT etc.

Individual Voluntary Arrangement (IVA) Alike a CVA but for individuals, as opposed to companies. It removes the burden of personal debt, so one can make a fresh start.

Insolvency Practitioner A professional who is an expert in insolvency and is licensed by DBIS. They act to close a company in the best possible way for all parties involved. Only IPs can be a liquidator or Administrator.

Insolvent A term that is used when a company/person cannot pay or cover their debts with the assets or funds they have. Liabilities exceed assets.

Insolvent Company A company that cannot pay its debts as and when they fall due i.e. becomes insolvent.

Interim Order This can be used when someone is applying for an IVA. They ask the court to protect them from legal or bankruptcy actions by someone they owe money to.

Investigating Accountants Accountants who look at the business you run. Generally, they are appointed by the banks to see how securely held debt is from the company. They check accounts, forecasts, marketplace and management. See a guide to Investigating accountants.

Joint Several Liability This implies that all members are liable for the partnership debts in full or in part individually, usually dependent on their ability to pay. Thus, a creditor(s) /liquidator can "go after" the member with the most assets to satisfy debts, then go on to the next and so on until all debts are satisfied or all partners are made bankrupt.

Liability Something that you owe to somebody, i.e. a mortgage, loan payment, credit cards.

Limited Company A business that is legally seen as a separate entity to its directors and shareholders, leaving them not liable for any of the business’s actions. Such businesses tend to be privately owned.

Limited Liability A mechanism that allows Limited Company and PLC shareholders to limit their responsibilities. For example, shareholders will lose no more than their investment in the business should it default.

Liquidation The process by which a company dies. A liquidator is appointed and disposes of all assets, distributing the proceeds to creditors, with any remaining going to shareholders. The company is then struck off from the register at Companies House.

Liquidator An insolvency practitioner who is responsible for dealing with the winding up of a company.

Moratorium - A period of time during which a certain activity is not allowed or required. Usually, this is put in place to protect a person, business or company.

No Fault Bankruptcy - Under the Enterprise Act 2002, the UK Government significantly relaxed the rules regarding bankruptcy. From April 2004, the sole trader or partner in a partnership, who has a failed business (where there are no issues of fraud, misfeasance, recklessness etc) is able to file for bankruptcy and be discharged from that bankruptcy within say 12 months.

Nominee A licensed Insolvency Practitioner who helps propose a deal with a company’s creditors, under the proposal of a CVA/IVA. Legal issues are dealt with as is compliance i.e. chairing the creditors meetings and checking management accounts and forecasts.

Official Receiver A civil servant in The Insolvency Service and an officer of the court. These individuals are notified by the court of any bankruptcy or winding-up orders, where they then become responsible for administering the initial stages which involves collecting and protecting any assets and investigating the causes of the event.

Partnership Similar to a sole trader, however there is more than one owner. Also, there can be several different people that own different amounts of the business.

Partnership Voluntary Arrangement (PVA) Similar to the process of a CVA yet used for a partnership as the proprietors are joint and severally liable.

Pay As You Earn (PAYE) A government scheme where your tax is deducted from your monthly wages and paid for by your employer.

Pension Fund A pot of money where contributions are made to build a fund to pay retirement pensions and funds that are drawn on to pay these pensions to ex-employees who were eligible for a pension.

Personal Guarantee A tool which financial service providers use to guarantee their debt, by requesting the director or partner in a business to personally guarantee the debt, regardless of whether the debt is used by the company or not. Should the debt default, the bank will call on the guarantor who upon signing, will have to pay the remaining debt.

Public Limited Company (PLC) A Company that has limited liability and trades shares of its business on the stock exchange, for anyone to own.

Receiver These individuals are appointed by the bank, to collect and administer a company's assets. They have a duty to collect the bank's debts, only by selling the assets. They tend not to be concerned with exposure to the other unsecured creditors or shareholders.

Receivership When a company defaults on a loan or payment, the debt holder can call on a receiver to go into the company to sell the company’s assets, in order to pay back some or all of the debt. Usually, the company will be liquidated or sold, always with a loss of jobs.  

Shareholders Someone who has bought shares of a company (if on the open market i.e. a PLC) or owns a stake in one (limited company). They have a say in how the business is run and earn a share of the profits, in form of a dividend.

Simultaneous Voluntary Arrangements This mechanism links together numerous simultaneous IVAs, to protect the partnership and individual debtors. It allows the partnership arrangement to deal with partnership debts and individual arrangements to deal with any individual debts. It also protects the individual partners from the "fallout" of the partnership debts to the individual.

Small Firms Loan Guarantee Scheme (SFLGS) A scheme whereby high street banks and other financial bodies can lend between £5,000 and £250,000 to new and existing businesses, so long they have a government guarantee against default by borrowers. If the company failed, the bank will be able to claim up to 75% back from the DBIS.

Sole Trader An owner of a business who is wholly responsible for the day to day running of the business and its debts.

Statement Of Affairs This is a statement of what you own, what assets you have, your liabilities and your cost of living. It summarizes your financial affairs.

Statutory Demand An action typically used after a creditor obtains a CCJ. It is the formal demand of payment for an undisputed debt (over £5,000) to be paid within 21 days of the demand being issued.  Failure to pay a statutory demand can lead to a winding up petition or bankruptcy being issued.

Supervisor The individual who collects payment of CVA/IVA contributions and ensures that contributions are kept up to date.

Trading Out This phrase is used when you continue to trade through tough times, in order to rectify your problems and improve your company's health.

Trustee In Bankruptcy, this is a person who holds property in trust for another i.e. the IP holds the property of the bankrupt in trust for creditors.

Turnaround Practitioner An advisor who specializes in helping ailing companies to solve their problems and get back on their feet i.e. the company doctor!  

Turnover The money that a business takes in over a period of time through its activities.

Unique Selling Proposition (USP) A unique point (or number of points) to distinguish your company from your competitors. Why do your customers buy from you? What is it about your product and/or service that distinguishes you? Different product/service lines or segments of your business may have different USPs.

Value Added Tax (VAT) A duty that is paid to HMRC, for qualifying goods of 20% above the company's selling price, less any VAT paid for goods the company has bought in the same period.

Walking Possession When a Bailiff (for the County Court) or Sheriff (for the High Court) visits your premises and obtains entry. They request payment of the proven debt. If you have not paid this, in addition to the court and the bailiff/sheriff’s costs, within the 5-day deal given, they have the right to take possession of the goods, equipment, fixtures, stock etc. on the premises.

Warrants – A document issued by a legal authorisation or governing body, before administrative actions can take place. As the creditor has not been paid under the CCJ issued, the creditor can apply to the court for a warrant of execution. A notice of warrant will then be issued to the debtor. If payment is not made a bailiff of the court can be sent to collect payment or seize goods.

Wrongful Trading When a director allows their company to continue in business when they know, or ought to have known, that there was no prospect of meeting the company’s liabilities as they fall due. They are technically lying about the companies’ current state.

Winding Up Petition The tool used where a company petitions to the court for a company to be closed down, if a debtor continuously refuses to pay its debts.

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

Legal advice: Clearly the descriptions are designed for general understanding, they may or may not be absolutely correct in every circumstance. We disclaim any potential or actual liability arising from any reliance upon any of these descriptions above or guides on this site.

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