Insolvency Glossary of Terms – Jargon Buster
Brief Definitions of Insolvency and Bankruptcy Terms and Expressions for England and Wales.
An administration order is a court order placing a company that is, or is likely to become, insolvent under the control of an administrator following a petition by the company, its directors or a creditor. The purpose of the order is to preserve the company’s business and assets to allow a reorganisation or ensure the most advantageous realisation of its assets whilst protecting it from action by its creditors. The administration of the insolvent estate of a deceased debtor. County court process permitting an individual with modest debts to pay off installments. No insolvency practitioner is involved.
AUTHORISED (OR LICENSED) INSOLVENCY PRACTITIONER
The person (usually an accountant or solicitor) authorised by the Department of Trade and Industry (DTI) or a professional body to act as trustee, nominee, supervisor, liquidator, administrative receiver or administrator. Only such a person can hold any of these offices.
The person appointed by the holder of a floating charge debenture over a company’s assets to collect in and realise the assets of that company and to repay the indebtedness to the debenture holder.
The term applied when an insolvency practitioner is appointed as an administrative receiver.
The insolvency practitioner appointed by the court to handle the affairs of a company the subject of an administration order.
A special remedy to take control of the assets of a farmer under the Agricultural Credits Act 1928.
Associates of individuals include family members, relatives, partners and their relatives, employees, employers, trustees in certain trust relationships, and companies which the individual controls. Associates of companies include other companies under common control.
Someone against whom a bankruptcy order has been made and who has not been discharged from bankruptcy.
The court order making an individual bankrupt (this replaces the concept of the receiving order and adjudication of bankruptcy in the old Act cases).
BANKRUPTCY RESTICTION ORDER
Bankruptcy Restriction Orders (BRO) are usually applied when the Official Receiver considers that a person applying for bankruptcy may have been dishonest or reckless in their spending. BROs can extend the period of bankruptcy from 2 to 15 years.
Insurance cover needed by a person who acts as an insolvency practitioner.
The appropriation of real or personal property for the discharge of a debt without giving the creditor any property in, or possession of, the subject of security.
Court order placing restrictions on the disposal of certain assets, such as property or securities, given after judgement and gives priority of payment over other creditors.
COMPANY DIRECTORS DISQUALIFICATION ACT (1986)
Consolidation Act on the disqualification of directors.
COMPANY VOLUNTARY ARRANGEMENT (CVA)
A voluntary agreement for a company is a procedure whereby a plan of reorganisation or composition in satisfaction of debts, is put forward to creditors and shareholders. There is limited involvement by the court and the scheme is under the control of a supervisor.
An agreement between debtor and his creditors whereby the compounding creditors agree with the debtor between themselves to accept from the debtor payment of less than the amounts due to them in full satisfaction of their claim.
The placing of a company into liquidation as a result of an application to the court, usually by a creditor.
Directors or shadow directors and their associates, and associates of the company.
Shareholder, every person liable to contribute to the assets of a company in the event of it being wound up.
A person, not necessarily a licensed insolvency practitioner, appointed to take charge of assets usually where they are subject to some legal dispute. Not strictly an insolvency process, the procedure may be used other than for a limited company, e.g. to settle a partnership dispute.
A creditors’ committee is formed to represent the interests of all creditors in supervising the activities of an administrator or trustee in bankruptcy, or receiving reports from an administrative receiver.
CREDITORS’ VOLUNTARY LIQUIDATION (CVL)
Relates to an insolvent company. It is commenced by resolution of the shareholders, but is under the effective control of creditors, who can choose the liquidator, liquidation committee.
A document stating the terms of a loan, usually to a company. Debentures may be secured on part or all of a company’s assets, or they may be unsecured. Often also referred to as a floating charge, and the lender is often referred to as the debenture holder.
DEED OF ARRANGEMENT
Method for an individual (not a company) to come to terms with creditors short of formal bankruptcy, it has now been almost completely replaced by Individual Voluntary Arrangements.
DISQUALIFICATION OF DIRECTORS
A director found to have conducted the affairs of an insolvent company in an “unfit” manner may be disqualified, on application to the court by the DTI, from holding any management position in a company for between 2 and 15 years.
EXTORTIONATE CREDIT TRANSACTION
An extortionate credit transaction is a transaction by which credit is provided on terms that are exorbitant or grossly unfair compared with the risk accepted by the creditor. Such a transaction may be challenged by an administrator, a liquidator or a trustee in bankruptcy.
A fixed charge is a form of security granted over specific assets, preventing the debtor dealing with those assets without the consent of the secured creditor. It gives the secured creditor a first claim on the proceeds of sale, and the creditor can usually appoint a receiver to realise the assets in the event of default.
A floating charge is a form of security granted to a creditor over general assets of a company which may change from time to time in the normal course of business (e.g. stock). The company can continue to use the assets in its business until an event of default occurs and the charge crystallises. If this happens, the secured creditor can realise the assets to recover his debt, usually by appointing an administrative receiver, and obtain the net proceeds of sale subject to the prior claims of the preferential creditors (e.g. Customs & Excise or Inland Revenue).
Where a company has carried on business with intent to defraud creditors, or for any fraudulent purpose. It is a criminal offence and those involved can be made personally liable for the company’s liabilities.
Basis on which insolvency practitioners prefer to sell a business. Effectively it means the business continues, jobs are saved, and a higher price is obtained.
A legal commitment to repay a debt if the original borrower fails to do so. Directors may give guarantees to banks in return for the bank giving finance to their companies. Companies in a group may guarantee each others loans.
INDIVIDUAL VOLUNTARY ARRANGEMENT (IVA)
A voluntary arrangement for an individual is a procedure whereby the person comes to an arrangement with his creditors in how their debt will be discharged. Such a scheme requires the approval of the court and is under the control of a supervisor.
The state of not being able to pay one’s debts as they fall due or having an excess of liabilities over assets.
INSOLVENCY ACT 1986 (IA 1986)
Primary legislation governing insolvency law and practice. Nevertheless, many other statues and statutory instruments are also relevant.
A company goes into insolvent liquidation if it goes into liquidation at a time when assets are insufficient for the payment of its debts and other liabilities and the expenses of liquidation.
INSOLVENCY PRACTITIONER (IP)
Person authorised by one of the chartered accountancy bodies, the Law Societies, The Insolvency Practitioners Association or the Department of Trade. The only person who may act as office holder in an insolvency proceeding.
The Insolvency Rules 1986, as amended, provide the detailed working procedures for the provisions of the Insolvency Act 1986.
INSOLVENCY RULES (IA 1986)
The Insolvency Rules 1986 (as amended) these Rules apply where the Act applies. Where the old Act continue to apply so do the Bankruptcy Rules 1952 and the Companies (Winding Up) Rules 1949. There are separate rules dealing with insolvent partnerships, insolvent deceased’s estates and deeds of arrangement.
An individual who intends to propose a voluntary arrangement to his creditors may apply to the court for an interim order which, if granted, precludes bankruptcy and other legal proceedings whilst the order is in force.
INVESTORS’ COMPENSATION SCHEME
A statutory scheme operated by the SIB (Securities and Investments Board) to give individual investors up to �48,000 protection if an authorised investment business collapses.
1. Recognition of a debt by a court.
2. Decision given by a court at the conclusion of a trial.
LAW OF PROPERTY ACT 1925 (LPA)
Governs transactions in law and property. Contains statutory powers of receivers appointed under a fixed charge.
Law of Property Act 1925 receiver: a person (not necessarily an insolvency practitioner) appointed to take charge of a mortgaged property by a lender whose loan is in default, usually with a view to sale or to collect rental income for the lender. Common in the case of failure of a property developer, whose borrowings will largely be secured on specific properties.
Right to retain possession of assets or documents until settlement of a debt.
The procedure whereby the assets of a company (or partnership) are gathered in and realised, the liabilities met and surplus, if any, distributed to members.
Committee of creditors who receive information from the liquidator and sanction some of his actions.
The person appointed to deal with the assets and liabilities of the company or partnership once the resolution to wind up has been passed or a compulsory winding up order has been made.
Court order preventing the disposal of assets.
Shareholder of a company.
MEMBERS’ VOLUNTARY LIQUIDATION (MVL)
A solvent liquidation where the shareholders appoint the liquidator to realise assets and settle all the company’s debts in full within 12 months.
Breach of duty in relation to the funds or property of a company by its directors or managers.
A transfer of an interest in land or other property by way of security, redeemable upon performing the condition of paying a given sum of money.
The person chosen by the individual or corporate debtor to report on the debtor’s proposals for an IVA or CVA.
A person who is required to be a qualified insolvency practitioner to hold the following posts, of a liquidator, provisional liquidator, administrator , administrative receiver, supervisor of a voluntary arrangement, or trustee in bankruptcy.
OFFICIAL RECEIVER (OR)
The civil servant employed by the DTI to head the regional offices whose responsibilities cover bankruptcies and compulsory liquidations.
The term onerous property in the context of a liquidation or bankruptcy, applies to unprofitable contracts and to property that is unsaleable or not easily saleable or that might give rise to a continuing liability. Such property can be disclaimed by a liquidator or a trustee in bankruptcy.
A written application to the court for relief or remedy.
POLICYHOLDERS PROTECTION ACT 1975
An act which established Policyholders Protection Board to provide compensation to the public in the event of the liquidation of an insurance company. The Board will make payment in full of liabilities under certain policies of compulsory insurance and 90 per cent of liability to provide policyholders under other general and investment type policies. Compensation is restricted to individual policyholders or partnerships; corporate policyholders are not protected.
A payment or other transaction in the six month to two year period preceding a liquidation, administration or bankruptcy, which places a creditor or a person connected with the insolvent, respectively, in a better position than they would have been otherwise. A liquidator, administrator or trustee in bankruptcy may recover any sums which are found to be preferences.
Defined in Schedule 6 of The Insolvency Act 1986. Has priority when funds are distributed by a liquidator, administrative receiver or trustee in bankruptcy.
PROOF OF DEBT
The document submitted in an insolvency to establish a creditor’s claim. It may be informal (by e.g. letter) or in a prescribed form (in bankruptcy and compulsory liquidations).
A creditor who claims is referred to as “proving” for his debt, and the document by which he seeks to establish his claim is his “proof”.
The person appointed by the court to deal with the affairs of the company until a compulsory winding up order.
The authority given by a creditor or member to another person (proxy holder) to attend a meeting and speak and vote at a meeting on behalf of the creditor ( principal) or member.
A person who is authorised to attend a meeting on behalf of someone else.
The person appointed by the court for some specific purpose or the person appointed by a mortgage to exercise his rights over the charges property under the Law of Property Act 1925 (not to be confused with the Official Receiver or Administrative Receiver.
The general term applied when a person is a appointed as a receiver or administrative receiver over certain assets.
RECOGNISED PROFESSIONAL BODY (RPB)
An organisation approved by the Secretary of State as being able to authorise its members to act as insolvency practitioners.
A body may be recognised if it regulates the practice of a profession and maintains and enforces rules for securing that such of its members as are permitted by or under the rules to act as insolvency practitioners-
(a) are fit and proper persons so to act, and
(b) meet acceptable requirements as to education and practical training and experience.
RESERVATION OF TITLE OR RETENTION OF TITLE AGREEMENT
An agreement for the sale of goods to a company, being an agreement; (a) which does not constitute a charge on the goods, but (b) under which, if the seller is not paid and the company is wound up, the seller will have priority over all other creditors of the company in respect to the goods or any property representing the goods.
A creditor with specific rights over some or all his debtor’s assets in the event of insolvency. In essence he is paid first from the secured assets.
A charge or mortgage over assets taken to secure payment of a debt. If the debt is not paid, the lender has a right to sell the charged assets. Security documents can be very complex. The commonest example is a mortgage over a property.
A person who is not formally appointed as a director, but in accordance with whose directions or instructions the directors of a company are accustomed to act. However, a person is not a shadow director merely because the directors act on advice given by him in a professional capacity.
A special manager is a person appointed by the Court in a compulsory liquidation or bankruptcy to assist the liquidator, official receiver or trustee in managing the insolvent’s business. He does not need to be an insolvency practitioner.
A formal notice requiring payment of a debt exceeding �750 within 21 days, in default of which bankruptcy or liquidation proceedings may be commenced without further notice.
The person appointed to supervise the implementation of the debtor’s proposals for an IVA or CVA once approved by creditors (and members).
TRANSACTION AT AN UNDERVALUE
A transaction at an undervalue can describe either a gift or a transaction in which the consideration received is significantly less than that given. In certain circumstances such a transaction can be challenged by an administrator, a liquidator or a trustee in bankruptcy.
- (a) in bankruptcy – the authorized insolvency practitioner appointed to deal with the estate of the bankrupt;
- (b) under a deed of arrangement – the authorized insolvency practitioner appointed to deal with the estate of the person who entered into the deed.
Strictly, any creditor who does not hold security. More commonly used to refer to any ordinary creditor who has no preferential rights, although, in fact preferential creditors will almost always also be unsecured. In any event, the last in the queue, ahead only of the shareholders.
Someone against whom a bankruptcy order has been made and who has not been discharged from bankruptcy.
VAT BAD DEBT RELIEF
The relief obtained in respect of the VAT element of an unpaid debt. Previously available only when the debtor became insolvent, relief is now available on any debt unpaid for more than 6 months.
The placing of the company into liquidation by resolution of the members – there are two types of voluntary liquidation member’s voluntary liquidation; and creditor’s voluntary liquidation. The first of these does not involve insolvency and comes about merely because the (shareholders) members wish to have the value of their shareholding realised e .g. on the retirement of the principals of the company was incorporated has been fulfilled.
(Or liquidation) – the procedure whereby the assets of a company (or partnership) are gathered in and realised, the liabilities met and the surplus, if any, distributed to members.
The order made by the court for a company to be placed in compulsory liquidation.
A winding-up petition is a petition presented to the court seeking an order that a company be put into compulsory liquidation.
Applied to companies in liquidation where a director allowed the company to continue trading in circumstances where he should have concluded that there was no reasonable prospect that the company would avoid going into solvent liquidation. The directors involved may be made personally liable to make a contribution to the company’s assets.
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