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Insolvency jargon explained

16 December 2015

Insolvency law can be complex and usually involves unfamiliar processes for directors and creditors. Like many other professions, there is quite a lot of jargon and a lot of information to take in. Below, we explain a few general terms used in insolvency:

Administration – This is a type of insolvency procedure and often the most reported on in the news. 

Usually large companies with significant debt or those threatened with legal action will call in the administrators to protect the business. The appointed administrators, usually licensed insolvency practitioners, will take control of the business and review viable options going forward.  This could mean the sale of the business or exit into a debt repayment plan, like a company voluntary arrangement (see below).  

Visit our administration page for more information on the process.

Bankruptcy – Often associated with companies, this actually only refers to individuals who are in debt and cannot pay his/her creditors. Those who declare themselves bankrupt cannot be company directors during the bankruptcy period. 

Company Voluntary Arrangement (CVA) – This is a deal between the company and its creditors whereby debt is repaid in instalments over a set period of time, usually three to five years. Directors stay in control of the company and the business continues trading. Read more on CVAs...

Creditors Voluntary Liquidation (CVL) – When a company is no longer viable and owes debt to creditors, the company can go into liquidation. The business and assets are sold and turned into cash for the creditors. Only creditors can appoint a liquidator (hence the name), however directors can initiate proceedings.

Distraint – An old term used for the process of seizing goods from the business premises after the company has failed to pay its debt. Directors first receive a Notice of Enforcement (see below) and are giving seven days to pay what it owes or court officers have the right to take control of the goods. View our page on the process here

Insolvency – A term used to describe a business that’s in debt and unable to make payments as and when they fall due. Check out our insolvency test page

Insolvency Practitioner – This is a professional specialising in insolvency and licensed by a membership body, for example, the Insolvency Practitioners Association to act as an administrator or liquidator. 

Moratorium – This is a period of time when certain actions cannot be enforced. For example, legal actions against an insolvent company are not allowed if there is a moratorium in place. 

Nominee –This is the term for a licensed insolvency practitioner who is dealing with CVA/IVA proposals and handles all the legal work for the client.

Notice of Enforcement – This is presented to a business that has failed to pay its debt, notifying they have seven days to pay. If the debt has not been repaid after this time, enforcement offers can take control of the goods.

(Also see distraint).

Official Receiver – This is a civil servant employed by the Insolvency Service and the court to handle winding up orders or bankruptcies.

Personal Guarantee – Often landlords and lenders request a personal guarantee (PG) before willing to proceed. If there’s a default, the personal guarantee can be called in and the debt must be repaid personally by the director. 

Preference – Directors have a duty to act in the creditors’ best interests when the company is insolvent. If one creditor is paid before another, this is known as ‘preference’ and is in breach of the Insolvency Act 1986.

Pre-pack administration – The sale of the business to a third party or new company set up by the existing director(s). Pre-packs take place upon the appointment of administrators, ensuring everything moves over efficiently. Employee contracts are also transferred over, saving jobs. 

Receivership – A creditor, usually a floating charge holder like the bank, appoints the receiver to sell certain assets or properties of the business to pay back the debt. The company usually then goes into liquidation.

SOFA – Statement of Affairs. This is information on everything the business owns as well as assets and liabilities involved.

Trading out – this is a term used to describe a business working through its financial problems like improving cash flow or cutting costs. Directors may be able to negotiate an informal deal with creditors. 

Winding up petition – this is a legal action issued and presented to the court by a creditor, usually HMRC, when a debt has been unpaid. It is often the last resort to retrieve debt and can result in the company going into administration. WUPs are made public, therefore banks, lenders and suppliers can freeze payments or back out - leading to even bigger problems. 

Wrongful trading – this is where a director knows the business is insolvent but continues to trade and take on credit. Directors can made personally liable or even disqualified if evidence is found in an investigation. 

Visit our glossary page for more insolvency terms.