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Glossary of Insolvency Terms

16 July 2019

Glossary of Insolvency Terms

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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