Insolvency – What Does It All Mean?

Insolvency law has many different elements to it and as a result it has many terms which can be difficult to get your head around! We have devised an insolvency glossary to assist you in understanding the different terminology involved with insolvency.

Administration – An insolvency procedure for a company struggling financially. An administration can only be commenced for one of the following purposes: rescuing the company as a going concern; achieving a better result for the company’s creditors as a whole than would be likely if the company entered liquidation instead; or realising property to make a distribution to one or more secured or preferential creditors.

Administrative receivership – Where a creditor, who holds a floating charge over an asset or assets of the company, appoints an insolvency practitioner over said asset(s).

Administrator – An insolvency practitioner who is appointed either by the court, the company or its directors, or by a floating charge holder, to achieve one of the purposes of administration.

Asset – something of value owned by a company or an individual.

Balance sheet insolvent – Where the value of a person or entity’s liabilities outweigh the value of their assets.

Bankruptcy – An insolvency process for individuals who cannot afford to pay their debts. Upon a bankruptcy order being made against an individual, the Official Receiver is appointed as their trustee in bankruptcy to manage their bankruptcy estate. A licensed insolvency practitioner can be appointed in place of the Official Receiver whose job it is to realise, i.e. sell, the bankrupt’s assets to pay their creditors. There are numerous legal obligations on someone who is declared bankrupt (including co-operating with the Official Receiver / Trustee) and whilst bankruptcy generally lasts one year, the period can be extended for a number of reasons.

Bankruptcy Order – A court order that makes someone formally bankrupt.

Bankruptcy petition – A formal document presented at court by a creditor seeking a bankruptcy order against an insolvent individual debtor.

Bona vacantia – This is Latin for “unclaimed goods”. It is the name given to property which is not owned by anyone, which passes to the Crown.

Cash flow insolvent – Where a person or entity is unable to pay their debts when they fall due.

Charge – Security over an asset. This gives the creditor who holds the charge the right to have the proceeds of sale of the asset paid to them in order to discharge the relevant debt.

Compulsory liquidation – The process of having a company wound up by the court.

Creditor – A person or entity who is owed money.

Creditors’ voluntary liquidation (CVL) – The process of voluntarily winding up a company (in contrast to being wound up by the court) initially instigated by the company’s board of directors.

De jure director – Someone who is appointed as a director and is registered at Companies House as one.

Debenture – A document which grants security over assets to ensure a loan is repaid.

Debt relief order (DRO) – An order of the court which provides that an insolvent debtor does not have to pay certain types of debts for a specified period of time. At the end of this period, the debts included within the DRO will be discharged (i.e. written off). This order is only available to individual debtors with debts lower than a specified amount and assets worth less than a specified value. This is currently set at £30,000 and so, if a debtor owes less than £30,000 and does not own their own home or have any other valuable assets, they may qualify for debt relief order.

Debtor – A person or entity who owes money.

Dissolution – Where a company ceases to exist as a legal entity at Companies House. If the company has any assets, these vest in the Crown as bona vacantia.

Fixed charge – A charge over a specific asset of a debtor.

Floating charge – A charge over a class of the debtor’s assets. The assets within the class are constantly changing, for example a business’ stock. The charge only attaches to the assets in question upon a “crystallising” event such as insolvency.

Individual voluntary arrangement (IVA) – An agreement entered into by an individual debtor and the debtor’s creditors as to how the debtor’s debts are to be repaid.

Insolvency Practitioner (IP) – A person who has been authorised by a regulated body to be appointed as an office-holder.

Insolvent – When a person or entity is unable to pay their debts when they fall due (cash flow insolvent) or if the value of their debts outweighs the value of their assets (balance sheet insolvent).

Insolvent liquidation – Where an insolvent company enters into liquidation.

Liquidation / winding-up – The process of realising, i.e. selling, a company’s assets to pay its creditors if an insolvent liquidation; or pay its members if a solvent liquidation.

Liquidator – An Official Receiver (only in the case of compulsory liquidation) or insolvency practitioner appointed as office holder of a company in liquidation who is obliged to investigate the company’s affairs; to realise the company’s assets and to distribute the proceeds to the company’s creditors after the payment of the costs and expenses of the liquidation.

LPA receivership – Short for Law of Property Act receivership. Where a receiver is appointed under the Law of Property Act 1925 to take charge of a property which is mortgaged when the mortgagee is in default.

Members’ voluntary liquidation (MVL) – The process of a company being wound up by a result of the resolution of its members. An MVL is only appropriate where the company is solvent: it cannot be used where the company is insolvent.

Misfeasance – Misconduct on the part of an officer of a company.

Moratorium – A period when creditors are restricted in the actions that they can take against the debtor.

Office Holder – A person who is in charge of the relevant insolvency procedure. For example, a liquidator of a company in liquidation; the trustee in bankruptcy in a bankruptcy or the administrator of a company in administration.

Official Receiver – An Official Receiver is a civil servant working for the Insolvency Service and is also an officer of the court. The Official Receiver is automatically appointed as liquidator in a compulsory liquidation and as trustee in bankruptcy on the making of a bankruptcy order.

Pari passu – The principle that all creditors of an insolvent debtor rank equally.

Phoenixing – The process of a company entering into an insolvency process and the company’s assets being transferred to another entity with some or all of the previous management. Phoenixing is often used to leave the liabilities with the old company.

Preferential creditors – Certain categories of creditors who are paid in preference in an insolvency procedure to other creditors. For example, an employee of a company which is paid by the RPS (Redundancy Payments Service). The RPS is then a subrogated preferential creditor which means it takes the place of the employees claims and the RPS is paid before other creditors. HMRC are also now a preferential creditor

Pre-pack administration – Where an agreement for the purchase of the company’s assets / business is entered into prior to administration; the company enters into administration and, usually upon or shortly after, the sale takes place.

Proof of debt – A written claim provided by a creditor to prove that a debtor owes a debt to them.

Provisional liquidator – A liquidator who is appointed provisionally by the court usually to protect the Company’s assets, books and records and / or to protect the public, after the presentation of a winding-up petition and pending the making of a winding-up order.

Receiver – An individual who is appointed to take possession of an asset for its protection or realisation.

Receivership – The appointment of a receiver by a creditor (and other third parties) to protect their interests in a debtor’s assets. There are two types of receivership: administrative receivership and LPA receivership.

Secured creditor – A creditor who has their debt “secured” against (i.e. they have a charge over) some or all of the debtor’s assets. For example, a person’s mortgage is often secured against their property. Because of this security, the mortgagor has the right to be paid before any unsecured creditors if the debtor becomes insolvent.

Shadow director – Someone who is not registered at Companies House as a director, but who acts as one in the management of a company.

Solvent liquidation – Where a solvent company’s affairs are wound down to enable its surplus assets, i.e. cash, to be paid to its members.

Statutory demand – A formal document which demands payment of a debt and is served on the debtor. The debtor can be either corporate or an individual. If the debtor fails to make payment as demanded, a presumption of insolvency is created and this can be used as a basis for the presentation of a winding-up petition in the case of a corporate entity or a bankruptcy petition in the case of an individual.

Supervisor – An insolvency practitioner who is appointed to supervise either an IVA or a CVA.

Trustee in Bankruptcy – An insolvency practitioner or Official Receiver appointed as office-holder of the bankrupt. He / she is obliged to realise the bankrupt’s assets for the benefit of the bankrupt’s creditors.

Unsecured creditor – A creditor who does not have a charge against any of the debtor’s assets. If the debtor becomes insolvent, unsecured creditors will rank last in receiving any realisations.

Voluntary liquidation – Where the company is wound up outside of court by its creditors and members.

Winding-up order – An order of the court ordering that a company is wound up.

Winding-up petition – A formal document presented at court by a creditor or contributory seeking a winding-up order against a company.

Here at Farleys, we pride ourselves on providing legal expertise with a down to earth approach. We try not to baffle with legal jargon but if you do come across terms you are unfamiliar with, we are always happy to explain these things throughout the process.

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