Administration, Insolvency and Rescue Glossary for England and Wales
Note: The below definitions, explanations and common insolvency phrases are not intended to be exhaustive summaries of the law. If you require assistance with any insolvency related matter, please contact us for further assistance.
Administration is a process which places a company under the control of a licensed insolvency practitioner and the protection of the court to achieve a specified statutory purpose. The purpose of administration is to save the company, or if that is not possible, to achieve a better result for creditors than in a liquidation, or if neither of those is possible, to realise property to enable funds to be distributed to secured or preferential creditors.
An administration order is: (1) a court order placing a company that is, or is likely to become, insolvent under the control of an administrator in order to achieve the purpose of administration, following a petition by the company, its directors, its liquidator or a creditor. (2) the administration of the insolvent estate of a deceased debtor (3) county court process permitting an individual with modest debts to pay off by instalments; no licensed insolvency practitioner is involved.
An administrative receiver is a licensed insolvency practitioner appointed by the holder of a floating charge covering the whole, or substantially the whole, of a company’s property. He can carry on the company’s business and sell the business and other assets comprised in the charge to repay the secured and preferential creditors. Sometimes abbreviated to receiver.
Administrative receivership is the term applied when a person is appointed as an administrative receiver. Commonly abbreviated to receivership.
An administrator is a licensed insolvency practitioner appointed to manage the affairs of a company to achieve the purpose of administration set out in the Insolvency Act 1986. The administrator will need to produce a plan, known as his proposals, for approval by the creditors to achieve this. 29
Agricultural receivership is a specialist remedy available to a secured creditor to take control of the assets of a farmer under the Agricultural Credits Act 1928.
Asset Based Lender
Asset-Based Lending is a form of Asset-Based Finance that uses assets on a company’s balance sheet as security against lending. Assets can include tangible and non-tangible assets, including debtors, stock, equipment, machinery and property, and Intellectual Property (IP).
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 (see also connected persons).
A bankrupt is an individual against whom a bankruptcy order has been made by the court. The order signifies that the individual is unable to pay his/her debts and deprives him/her of his/her property, which is then realised for distribution amongst his creditors.
Balance Sheet Insolvency
Balance sheet insolvency generally occurs when a company cannot pay its bills when they are due due to insufficient funds and assets.
Bankruptcy is the process of dealing with the estate of a bankrupt.
A bond is Insurance cover to protect the uncharged assets of an estate, needed by a person who acts as a licensed insolvency practitioner.
A break-up sale is the dismantling of a business. Trading ceases and the assets are sold off piecemeal.
Cashflow insolvency generally occurs when a company cannot pay its bills when they are due, due to being 'cash poor'. The company may still have sufficient assets to pay the monies owed e.g. a property ownership company. Cashflow insolvency is different to Balance Sheet insolvency, where the company does not have either enough cash or assets to pay its debtors.
A charge is a right given to the creditor to have a designated asset of the debtor appropriated to the discharge of the indebtedness, but not involving any transfer either of possession or ownership.
A charging order is a 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)
The Company Directors Disqualification Act (1986) is an act concerning the disqualification of persons from being directors or otherwise concerned with a company’s affairs.
Company Voluntary Arrangement (CVA)
A company voluntary arrangement is a voluntary arrangement for a company whereby a plan of reorganisation or composition in satisfaction of its 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.
A composition is an agreement between debtors and creditors whereby the compounding creditors agree with the debtor and between themselves to accept from the debtor payment of less than the amounts due to them in full satisfaction of their claim.
A compulsory liquidation of a company is a liquidation ordered by the court. This is usually as a result of a petition presented to the court by a creditor and is the only method by which a creditor can bring about a liquidation of its debtor company.
Connected persons are directors or shadow directors and their associates, and associates of a company.
The Cork Report is a product of the Insolvency Law Review Committee, chaired by Sir Kenneth Cork, upon which the Insolvency Act 1986 is substantially based (Command Paper 8555, 1982).
A court-appointed receiver is 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, eg to settle a partnership dispute.
A creditors’ committee is a committee formed to represent the interests of all creditors in administrations, administrative receiverships and bankruptcies. The exact functions of the Committee depend on the type of procedure (see Liquidation Committee).
Creditors’ Voluntary Liquidation (CVL)
A creditors’ voluntary liquidation 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.
A debenture, broadly speaking, is a document which either acknowledges or creates a debt. The expression is commonly used to denote a document conferring a fixed and floating charge over all the assets and undertakings of a company.
Deed of Arrangement
A deed of arrangement is a method for an individual (not a company) to come to terms with creditors outside formal bankruptcy. The procedure is governed by the Deeds of Arrangement Act 1914 and is now almost completely replaced by voluntary arrangements.
Disqualification of Directors
A director found to have conducted the affairs of an insolvent company in an ‘unfit’ manner will be disqualified, on application to the court by the DTI, from holding any management position in a company for between two and 15 years.
Extra Statutory Concession C16 (ESC C16) was an extra statutory concession offered by HMRC which was available in the United Kingdom. It allowed for a company to be wound up with HMRC’s approval and receive any distribution as a capital gain without having to appoint a liquidator. This concession was no longer available as of 1 March 2012.
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.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme was established under the Financial Services and Markets Act 2000 to provide compensation for certain claims in the event of the default of a regulated financial services business. From 1 December 2001 it replaced the previous compensation schemes for investment business, banking, building societies and insurance. Maximum levels available under the Financial Services Compensation Scheme are:
Deposits – 100% of the first £50,000.
Investments – 100% of the first £30,000, 90% of the next £20,000.
Insurance – 100% of the first £2,000, 90% ofthe remainder of claim or value.
Claims under certain policies of the compulsory insurance are paid in full.
A fixed charge is a form of security granted over specific assets, preventing the debtor from 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 (eg 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.
Fraudulent trading involves a company which 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.
A going concern is the basis on which licensed insolvency practitioners prefer to sell a business. Effectively it means the business continues, jobs are saved, and a higher price is obtained.
A guarantee is 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.
Individual Voluntary Arrangement (IVA)
A voluntary arrangement for an individual is a procedure whereby a scheme of arrangement of his affairs or composition in satisfaction of his debts is put forward to creditors. Such a scheme requires the approval of the court and is under the control of a supervisor.
Insolvency is defined as having insufficient assets to meet all debts, or being unable to pay debts as and when they are due. If a creditor can establish either test, he will be able to present a winding-up petition. For a bankruptcy petition, inability to pay is the only available ground.
Insolvency Act 1986
The Insolvency Act 1986 is the primary legislation governing insolvency law and practice. Nevertheless, many other statutes and statutory instruments are also relevant.
Insolvency Services Account
The Insolvency Services account is an account maintained at the Bank of England by the Department of Trade and Industry, for handling funds in liquidations and bankruptcies.
A company goes into insolvent liquidation if its goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of liquidation.
Insolvent Partnerships Order 1994 (IPO)
The Insolvent Partnerships Order 1994 is an Order setting out the procedures for dealing with insolvent partnerships. The order provides for winding up an insolvent partnership as an unregistered company, with or without concurrent insolvency proceedings against individual partners; for the joint bankruptcy of individual partners, without winding up the partnership as an unregistered company; and for the application of the administration and company voluntary arrangement procedures to insolvent partnerships.
Insolvency Practitioner (IP)
See Licensed Insolvency Practitioner.
The Insolvency Rules 1986, as amended, provide the detailed working procedures for the provisions of the Insolvency Act 1986.
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 while the order is in force.
Invoice financing is a form of asset based lending, and is a method of raising finance against the amounts due to a business from its customers. This method can help improve business cash flow to perhaps pay suppliers and employees whilst waiting upon their own customers to pay their bills. There is normally a small fee involved representing a percentage of the invoice amount to the lender as a fee for borrowing the money. This type of finance can also assist a business where it is experiencing difficulties in obtaining other types of business credit.
A judgement is:
- recognition of a debt by a court
- decision given by a court at the conclusion of a trial.
Law of Property Act 1925
The Law of Property Act 1925 governs transactions in law and property. Contains statutory powers of receivers appointed under a fixed charge.
Law of Property Act 1925 receiver is 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 the failure of a property developer, whose borrowings will largely be secured on specific properties.
Licensed Insolvency Practitioner (IP)
A licensed Insolvency Practitioner (IP) is a person licensed by one of the Chartered Accountancy bodies, the Law Societies, the Insolvency Practitioners’ Association or the Secretary of State for Trade and Industry. The only person who may act as an office holder in an insolvency. Persons claiming to be insolvency practitioners, but who do not hold a licence may not be able to help you.
Lien is the right to retain possession of assets or documents until the settlement of a debt.
Liquidation is the process whereby a company has its assets realised and distributed to satisfy, insofar as it is able, its liabilities and to repay its shareholders. The term winding up is also used. Liquidation is usually a terminal process, followed by the dissolution of the company.
A liquidation committee is a committee which receives information from the liquidator and sanctions some of his actions. Usually consists entirely of creditors, but may also comprise shareholders (see Creditors’ Committee).
A liquidator is a Licensed insolvency practitioner appointed to wind up a company.
A Mareva Injunction is a court order preventing the disposal of assets.
Members’ Voluntary Liquidation (MVL)
A members’ voluntary liquidation is a solvent liquidation where the shareholders appoint the liquidator to realise assets and settle all the company’s debts, plus interest, in full within 12 months.
Misfeasance is a breach of duty in relation to the funds or property of a company by its directors or managers.
A mortgage is a transfer of an interest in land or other property by way of security, upon the express or implied condition that the asset shall be reconveyed to the debtor when the sum secured has been paid.
A nominee is a Licensed insolvency practitioner nominated in a proposal for an individual or company voluntary arrangement to act as supervisor of the arrangement.
Notice of Intent
A Notice of Intent (or Notice of Intention to Appoint an Administrator) is a declaration made by a business to its creditors that it intends to appoint an administrator, settle its debts and save the business. The Notice is filed at court. There are criteria as to when a Notice of Intention to Appoint an Administrator can and cannot be used – please contact us for further information.
An office holder is a liquidator, provisional liquidator, administrator, administrative receiver, supervisor of a voluntary arrangement, or trustee in bankruptcy.
Official Receiver (OR)
An official receiver (OR) is an officer of the court, civil servant, member of the Department of Trade Insolvency Service and deals with 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.
Partnership Voluntary Arrangement
The term used informally to describe the company voluntary arrangement procedure as applied to partnerships under the provisions of The Insolvent Partnerships Order 1994.
A petition is a written application to the court for relief or remedy.
A preference is a payment or other transaction made by an insolvent company or individual which places the receiving creditor in a better position than they would have been otherwise. A liquidator, administrator or trustee in bankruptcy may recover sums which are found to be preferences, if the transactions took place within a period of either two years (where the creditor is a connected person) or six months (in other cases) of the insolvency.
Defined in Schedule 6 of The Insolvency Act 1986. They have priority when funds are distributed by a liquidator, administrator, administrative receiver or trustee in bankruptcy.
A 'pre-pack' is a deal for the sale of an insolvent company’s business and assets agreed in principle before the company enters a formal insolvency process (usually administration). The 'in principle' deal is normally agreed prior to an insolvency practitioner being appointed, meaning that the deal can be executed rapidly once the appointment is made.
Proof of Debt
Proof of debt is a document submitted by a creditor to the licensed insolvency practitioner or Official Receiver giving evidence of the amount of the debt.
Provisional liquidator is the name usually given to a licensed insolvency practitioner appointed, to safeguard a company’s assets after presentation of a winding-up petition but before a winding-up order is made.
A proxy is a document by which a creditor authorises another person to represent him at a meeting of creditors. The proxy may be a general proxy, giving the proxy holder discretion as to how he votes, or a special proxy requiring him to vote as directed by the creditor. A body corporate can only be represented by a proxy.
A proxy holder is a person who attends a meeting on behalf of someone else.
A receiver is often used to describe an administrative receiver, who may be appointed by a secured creditor holding a floating charge over a company’s assets. More accurately, a receiver is the person appointed by a secured creditor holding a fixed charge over specific assets of a company in order to take control of those assets for the benefit of the secured creditor.
A receivership is the general term applied when a person is appointed as a receiver or administrative receiver.
Recognised Professional Body (RPB)
A recognised professional body is an organisation recognised by the Secretary of State for Trade and Industry (such as R3 (insert link)) as being able to authorise its members to act as licensed insolvency practitioners.
A relevant date is the date by reference to which preferential claims are reckoned.
Reservation of Title (or Retention of Title)
Reservation of title (or retention of title) is a provision under a contract for the supply of goods which purports to reserve ownership of the goods with the supplier until the goods have been paid for. A complex and continually evolving area of law.
Scheme of Arrangement
A scheme of arrangement is a term normally used to describe a compromise or arrangement between a company and its creditors or members or any class of them under section 425 of the Companies Act 1985, which may involve a scheme for the reconstruction of the company. If a majority in number representing three fourths in value of the creditors or members or any class of them agree to the compromise or arrangement it is binding if sanctioned by the court. Section 425 may be invoked where there is an administration order in force in relation to the company, where there is a liquidator or provisional liquidator in office, or where the company is not subject to any insolvency proceedings. The term is also used in Section 1 of the Insolvency Act 1986 in relation to company voluntary arrangements.
A secured creditor is a creditor with specific rights over some or all of a debtor’s assets. A secured creditor gets paid first out of the proceeds of sale of the security.
A security is 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 shadow director is 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 a licensed insolvency practitioner.
Statement of Affairs (SOA)
A statement of affairs provides an Insolvency Practitioner with an overview of the company's assets and liabilities, to be able to assess everything the company may own, as well as details of fixed or floating charges.
A statutory demand is 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. Cannot be used where the debt is disputed. Supervisor A supervisor is the licensed insolvency practitioner appointed by creditors to supervise the way in which an approved voluntary arrangement is put into effect.
Time to Pay Arrangements (TTP)
A time to pay arrangement is an agreement entered into between a company and HMRC when the company cannot pay its corporation tax or VAT liabilities on time. It is essentially a debt repayment plan staggered over 6-12 months and paid by Direct Debit directly to HMRC. It is strongly recommended that you [contact u]s before entering into any agreement so that we can assess your affordability levels.
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.
Quite apart from its common usage (eg under the Trustee Act 1925) this is a term used for a variety of insolvency appointments, including the licensed insolvency practitioner appointed in an English bankruptcy, a Scottish sequestration, a deed of arrangement; a Scottish trust deed and an administration order (of the affairs of a deceased debtor). Undervalue Transaction See Transaction at an Undervalue.
An unsecured creditor, strictly, is 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 have an element that is unsecured. In any event, they are the last in the queue to be paid out, apart from shareholders.
VAT Bad Debt Relief
VAT bad debt relief is 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 where debt is six months old at the relevant date.
See Individual Voluntary Arrangement (IVA) and Company Voluntary Arrangement (CVA).
See creditors’ voluntary liquidation and members’ voluntary liquidation.
A winding-up order is an 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.
Wrongful trading is a term 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 insolvent liquidation. The directors involved may be made personally liable to make a contribution to the company’s assets.