Glossary of Insolvency Terms

In relation to a company, the court, the holder of a floating charge, the company itself, or the directors may appoint an administrator. The purpose of the appointment is to protect the company from action by its creditors while the best solution to the company's financial problems can be found. Whoever appoints him, the administrator must seek to rescue the company or achieve a better result for creditors than if the company were wound up.

A licensed insolvency practitioner appointed to manage the business and property of a company which is in administration. The administrator will prepare proposals for the creditors setting out how the purpose of the administration will be achieved.

Administrative Receiver
A licensed insolvency practitioner appointed by a secured creditor, typically a bank, holding a floating charge over the company's assets. The insolvency practitioner will seek to realise the assets in order to pay the secured creditor.

The administrative receiver also has a duty to pay preferential creditors from floating charge asset realisations. However, he has no authority to distribute funds to unsecured creditors , which is the responsibility of a liquidator.

Administrative receivership
The procedure whereby an administrative receiver is appointed by the holder of a floating charge over the assets of a company. The administrative receiver is appointed in order for the floating charge-holder to recover money owed to it.

A cancellation of a bankruptcy order, on an application to the Court, on the basis that the bankrupt is able to settle his debts in full and pay interest at the statutory rate on those debts. It can also be annulled if the order should never have been made in the first place.

A person subject to a bankruptcy order. A bankrupt is subject to certain restrictions during the period of his bankruptcy, such as not being able to act as a company director without the leave of the court, not being to obtain credit above certain limits without disclosing his bankrupt status and any surplus income over and above basic needs will have to be paid to 'the bankruptcy estate'.

Bankruptcy Offences
A bankrupt commits a criminal offence if prior to his bankruptcy he fraudulently sold on property that he had not paid for or gives away assets to avoid his creditors. Similarly, after the bankruptcy, he commits an offence by concealing assets, books and records or making false statements to his trustee.

Bankruptcy Order
An order of the court whereby a person is made bankrupt. The property and assets of the bankrupt, subject to certain restrictions, will be sold and the money distributed to creditors. A bankruptcy order may be made following a petition to the Court by the bankrupt or a creditor.

Bankruptcy restrictions order or undertaking
A bankrupt who has been dishonest or in some other way to blame for their bankruptcy may have a court order made against them or may have to give an undertaking which will mean that bankruptcy restrictions continue to apply for between two to fifteen years after discharge.

A form of security over assets, usually a property, similar to a mortgage. A charge may be fixed or floating and it may be in the form of a mortgage or a debenture or other charging document. It protects a creditor in the event of non-payment of a debt. (See 'Fixed Charge' and 'Floating Charge', below.)

The holder of a charge over assets.

Company Voluntary Arrangement (CVA)
A procedure whereby the creditors accept proposals put forward by a company, to deal with their debts. This may involve continued trading, debt for equity swaps, partial sale of the business or the creditors accepting payment of an amount less than the full debt. A company voluntary arrangement is controlled by a licensed insolvency practitioner acting as a supervisor.

Compulsory liquidation / winding up
The winding up of a company after a petition to the court, usually by a creditor. The court orders that a company be wound up or 'placed into liquidation'. The company's assets are sold and the money paid to the creditors. The court order may be made upon a petition to the court by one of various parties, such as a creditor, the directors, a contributory (see below) or by the company itself.

Every person liable to contribute to the assets of a company if it is wound up. In most cases this means shareholders who have not paid for their shares in full.

Someone owed money by an individual or a company.

Creditors' committee
A committee of at least three creditors appointed to represent all creditors and to assist the insolvency practitioner in the discharge of his duties in a formal insolvency procedure.

Creditors' Voluntary Liquidation (CVL)
A procedure whereby an insolvent company is placed into liquidation by the members and the liquidator is chosen by the creditors.

A document issued as evidence of a debt or the granting of security for a loan. The term is often used in relation to loans from banks secured by charges over a company's assets.

Someone who owes money to an individual or a company. Also used as an alternative to 'bankrupt' to describe someone in bankruptcy.

De Facto director
A person holding himself out to be a director, but who has not been registered as a director at Companies House. He or she will purport to have the authority to bind the company and therefore is subject to the same liabilities as a formally appointed director.

A person appointed by the shareholders who directs the affairs of a company and can legally bind that company.

Director's disqualification order
An order of the court, disqualifying a person from being involved in the management of a company for between two and fifteen years. An order will be made when the court concludes that a director is unfit to manage the affairs of a limited liability company. A director may give an undertaking not to be involved in the management of a company for a specified period rather than go to court.

A bankrupt is automatically discharged from the restrictions and obligations of his bankruptcy, and from all his debts and liabilities that existed prior to his bankruptcy, at the end of a fixed period of one year. The period of bankruptcy can be shorter if the Official Receiver makes an application for an early discharge. It may also be longer, where the Official Receiver makes an application for extension in the case where a bankrupt has 'misbehaved' or been uncooperative during the bankruptcy. The administration of the bankrupt's estate is likely to continue for longer than the bankruptcy period.

An amount distributed to creditors in a formal insolvency.

A process whereby assets are seized because of the non-payment of a particular debt. These assets are then sold and the proceeds used to repay that debt.

Fixed charge
A charge held over specific assets. The debtor cannot sell the assets without the consent of the secured creditor or first repaying the amount secured by the charge. The chargeholder has first right to proceeds from the sale of the assets. This right ranks ahead of the claims of all other creditors.

Floating charge
A charge held over general assets of a company. The assets may change (such as stock) and the company can use the assets without the consent of the secured creditor until the charge "crystallises" (becomes fixed). Crystallisation occurs on the appointment of an administrative receiver, after the presentation of a winding-up petition or as otherwise stated in the document creating the charge. The chargeholder may appoint an administrative receiver or an administrator.

Fraudulent trading
Fraudulent trading occurs where any business of a company has been carried on with the intent to defraud creditors. A person found guilty of causing a company to trade fraudulently may be made personally liable to make a contribution to the company's assets.

A written agreement to pay a debt owed by another party; it must be in writing for it to be enforceable.

Individual voluntary arrangement (IVA)
An Individual Voluntary Arrangement is a legally binding agreement between an insolvent individual and his creditors, for the repayment of debts in full or in part. The procedure is an alternative to bankruptcy. This may involve the continued trading of a business, the contribution of cash or assets from a third party, income contributions, the partial sale of an individual's assets. An IVA is monitored by a licensed insolvency practitioner acting as a supervisor.

There are two tests to establish insolvency. One is being unable to pay debts as they fall due, known as the 'cash flow test'. The other is where liabilities exceed assets; the 'balance sheet test'.

Insolvency service
An executive agency of the Department of Business Enterprise and Regulatory Reform responsible for administering insolvency laws. Its principal functions are:

  • to investigate the affairs of bankrupts and companies in compulsory liquidation
  • to handle the disqualification of unfit directors
  • to act as trustee or liquidator in cases where an insolvency practitioner is not acting
  • to regulate insolvency practitioners, either directly or through the recognised professional bodies
  • to provide policy advice to government ministers.

Insolvent liquidation
A liquidation where assets are insufficient for a company to pay in full its debts and the expenses of the winding up.

Insolvency practitioner (IP)
A person, licensed by a recognised professional body or the Secretary of State, who may act as an office holder in insolvency proceedings.

Insolvency procedures
This term refers to any of the procedures under the Insolvency Act 1986 such as liquidation, bankruptcy, administration and voluntary arrangements. It is also often used to refer to other procedures not directly covered by the Insolvency Act 1986, such as fixed charge receiverships and informal arrangements.

An order of the court for payment of a debt.

Licensed Insolvency Practitioner
An individual who is qualified to act as an office holder in a formal insolvency. He or she must be licensed by a recognised professional body or the Secretary of State to carry out insolvency work.

Liquidation (winding up)
Applies to companies or partnerships. It involves the realisation and distribution of assets and usually the closing down of the business. There are three main types of liquidation - compulsory, creditors' voluntary and members' voluntary. (See these headings for definitions.)

An insolvency practitioner appointed to administer the liquidation and sell and distribute all of the assets of a company or partnership prior to it being dissolved. In a compulsory liquidation the Official Receiver may act as the liquidator.

Member (of a company)
A person who has agreed to be, and is registered as, a member, such as a shareholder of a limited company.

Members' voluntary liquidation
A procedure for the liquidation of a solvent company. The liquidator is appointed by the shareholders.

An insolvency practitioner who reviews a proposal for a Voluntary Arrangement and makes a report to the Court including whether, in his view, a meeting of creditors should be called to consider the proposals.

Officer (of a company)
A director or company secretary of a company.

Office holder
A person appointed under the Insolvency Act 1986 to act as a trustee in bankruptcy, liquidator, administrator, administrative receiver or supervisor of a voluntary arrangement.

Official Receiver (OR)
A civil servant employed by The Insolvency Service, who deals with bankruptcies and compulsory liquidations. The Official Receiver's functions include the investigation of the affairs of bankrupts and companies in compulsory liquidation. He also acts as liquidator and trustee of last resort in bankruptcies and compulsory windings up.

Partnership voluntary arrangement
In a partnership voluntary arrangement creditors of a partnership accept proposals, put forward by the partnership, to deal with its debts. This may involve continued trading, contribution of cash or assets from a third party, income contributions, sale of some of the partnership's assets or accepting an amount less than repayment of debts in full. The procedure is controlled by a licensed insolvency practitioner acting as a supervisor.

A formal application made to a court. In insolvency proceedings, petitions are made to obtain bankruptcy or compulsory winding up orders.

Preferential creditor
Creditors who have priority to receive funds before floating charge holders and unsecured creditors. These currently include employees in respect of unpaid wages, up to £800, and holiday pay. The Crown departments, such as HM Revenue & Customs, lost their preferential status on 15 September 2003.

Prescribed part
That part of a company's assets that, by legislation, is ring fenced and made available to satisfy the claims of unsecured creditors instead of the holders of floating charges. It is 50% of the first £10,000 of the specified funds and 20% of the balance, up to a maximum of £600,000.

Proof of debt
A form completed by a creditor in a formal insolvency procedure to state how much is claimed. The form is supplied by the office holder.

Provisional liquidator
Official Receiver or an Insolvency Practitioner appointed to preserve a company's assets pending the hearing of a winding up petition.

Instead of attending a meeting, a person can appoint someone to attend and vote in their place - a 'proxy'. This is done by submitting a 'Proxy Form'.

Proxy Form
The form that must be completed if a creditor (or member) wishes someone else to represent him or her at a creditors' meeting (or members meeting)and vote on his or her behalf.

Public examination
When a company is being wound up or in bankruptcy proceedings, the Official Receiver may at any time apply to the court to question the company's director(s) or any other person who has taken part in the promotion, formation or management of the company or the bankrupt.

Realising an asset means selling it or disposing of it to raise money, for example to sell an insolvent's assets and obtain the proceeds.

The name commonly used for an administrative receiver. The term can also mean a person appointed by the court or with the power to receive the rents and profits of property. Receivers who are not administrative receivers do not need to be insolvency practitioners.

A company in administrative receivership is often said to be "in receivership".

A procedure that cancels a winding-up order.

Recognised professional body
A body authorised by the Secretary of State to licence its members to act as insolvency practitioners. These bodies include the Institute of Chartered Accountants of England and Wales, the Insolvency Practitioners' Association and the Law Society.

The process by which the Official Receiver or an Insolvency Practitioner is discharged from the liabilities of office as trustee,liquidator or administrator.

Retention of title clause
A clause in a sales contract whereby the seller attempts to retain ownership of goods that have been delivered to a buyer but not paid for.

Secretary of State
The Secretary of State for the Department of Business Enterprise and Regulatory Reform. The Secretary of State is responsible for administration of the insolvency laws and has the power to licence insolvency practitioners.

Secured creditor
A creditor who holds security, such as a mortgage, over a person's assets for money owed.

A charge, mortgage or other right in respect of assets which secures payment of a debt.

Shadow director
A person who, without being formally appointed, gives instructions on which the directors of a company are accustomed to act.

Able to pay one's debts as they become due or having a surplus of assets over liabilities.

Statement of affairs
A document sworn under oath, completed by a bankrupt, or company director(s), stating the value of assets and giving details of creditors.

A licensed insolvency practitioner appointed by creditors to supervise the implementation of a voluntary arrangement.

Trustee in bankruptcy
A licensed insolvency practitioner appointed to administer a bankrupt's estate.

Unsecured creditor
A creditor who does not hold security (such as a mortgage) for money owed. Unsecured creditors rank behind secured and preferential creditors in the order of distribution of assets. This means that if the secured and preferential creditors are not paid in full, there will be no money for the unsecured creditors. However, in certain circumstances some of a company's assets may be made available to unsecured creditors at the expense of a floating charge holder (see prescribed part).

Voluntary liquidation
A method of liquidation not involving the courts or the Official Receiver. There are two types of voluntary liquidation - members' voluntary liquidation for solvent companies and creditors' voluntary liquidation for insolvent companies. A licensed insolvency practitioner must act as liquidator.

Winding up order (liquidation)
Order of a court, usually based on a creditor's petition, for the compulsory winding up of a company or partnership. The Official Receiver or a licensed insolvency practitioner will be appointed as liquidator in order to sell and distribute the assets of the company prior to it being dissolved. The Official Receiver may also act as liquidator.

Wrongful trading
Wrongful trading applies in relation to a person if:

  • a company has gone into insolvent liquidation, and
  • at some time before the winding up of the company that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and
  • the person was a director of the company at that time.

The director involved may be made personally liable to make a contribution to the company's assets.