Insolvency Glossary of Terms - Jargon Buster

The following definitions of Insolvency and Bankruptcy terms are for citizens of England and Wales.

ADMINISTRATION ORDER

This is a court order that places a company that is, or most likely will be, insolvent under the control of an administrator. It follows upon a petitioning by the company, a creditor, or the directors of a company. The point of an administration order is to preserve the business and assets of a company as a means of allowing reorganization and making sure that its assets are realized in an advantageous fashion while simultaneously protecting it from creditors.

AUTHORISED (OR LICENSED) INSOLVENCY PRACTITIONER

This is an individual, typically a lawyer or accountant, who has been authorized by the Department of Trade and Industry to act as a supervisor, liquidator, administrator, trustee, nominee, or administrative receiver.

ADMINISTRATIVE RECEIVER

This individual is appointed by the holder of a floating charge debenture over a company’s assets. They collect in and realize a company’s assets and pay back the indebtedness to the debenture holder.

ADMINISTRATIVE RECEIVERSHIP

When an insolvency practitioner has been appointed as an administrative receiver, then administrative receivership is said to have taken place.

ADMINISTRATOR

The administrator is the insolvency practitioner who has been appointed by the court in order to handle the affairs of a company deriving from an administration order.

AGRICULTURAL RECEIVERSHIP

Under the Agricultural Credits Act of 1928, this special remedy allows one to take control over a farmer’s assets.

ASSOCIATES

Relatives, family members, business partners and their relatives – all of these may be included as associates of individuals. Associates may also include employees, employers, companies that the individual controls, and trustees in certain trust relationships. “Associates” may also refer to associates of companies; these include companies that are under common control.

BANKRUPT

This describes an individual against whom a bankruptcy order has been filed and who has not been discharged from bankruptcy.

BANKRUPTCY ORDER

This is the court order that makes a person bankrupt.

BANKRUPTCY RESTRICTION ORDER

When the Official Receiver decides that an individual applying for bankruptcy has been dishonest or reckless in their spending, then a bankruptcy restriction order, or BRO, may be applied. This order may effectively extend the bankruptcy period from two to fifteen years.

BOND

This is the insurance cover that is required by an individual acting as an insolvency practitioner.

CHARGE

This is the appropriation of personal property or real property for the discharge of a debt. It does not give the creditor any property in, or possession of, the subject of security.

CHARGING ORDER

The charging order is a court order that places restrictions on the disposal of particular assets, like securities or properties. It is given after a judgment, and gives priority of payment over other creditors.

COMPANY DIRECTORS DISQUALIFICATION ACT (1986)

This is the Consolidation Act on the disqualification of directors.

COMPANY VOLUNTARY ARRANGEMENT (CVA)

This agreement puts forward a plan of reorganization or composition in satisfaction of debts. It is presented to creditors and shareholders of a company. There is very little involvement by the court. A supervisor controls the scheme.

COMPOSITION

In this agreement between creditors and a debtor, the compounding creditors agree with the debtor to accept payment of less than the amounts due to them in full satisfaction of their claim.

COMPULSORY LIQUIDATION

A creditor makes application to the court, which grants the placing of a company in to liquidation.

CONNECTED PERSONS

This refers to directors or shadow directors as well as their associates, and associates of the company.

CONTRIBUTORY

A contributory is a shareholder, as well as every other person liable to contribute to the assets of a company in the event of it being wound up.

COURT-APPOINTED RECEIVER

This is an individual, not necessarily a licensed insolvency practitioner, who is appointed to take charge of assets when they are subject to some legal dispute. The procedure may or may not be an insolvency process.

CREDITORS' COMMITTEE

This is a committee that is formed as a means of representing the interests of all creditors in overseeing the activities of an administrator or trustee in the event of a bankruptcy.

CREDITORS' VOLUNTARY LIQUIDATION (CVL)

This relates to an insolvent company. A CVL is launched by resolution of the company’s shareholders. It is, however, kept under the control of creditors, who are able to choose the liquidator, as well as the liquidation committee.

DEBENTURE

This is a document that delineates the terms of a loan, usually to a company. Debentures may be secured on part or all of a company's assets; they may also be unsecured. A debenture is often referred to as a floating charge. The lender is often referred to as the debenture holder.

DEED OF ARRANGEMENT

This describes a method for an individual – not a company – to come to terms with creditors just short of declaring bankruptcy. This process has now been replaced by Individual Voluntary Arrangements.

DISQUALIFICATION OF DIRECTORS

If a director is found to have conducted the affairs of an insolvent company in an “unfit” fashion, he or she may be disqualified upon petitioning of the court by the DTI. They will thus not be allowed to hold any management position within the company for a period of two to fifteen years.

EXTORTIONATE CREDIT TRANSACTION

In such transactions, credit is provided on terms that are unfair or exorbitant compared with the risk that the creditor has accepted. An administrator, trustee, or liquidator can challenge such terms in the event of bankruptcy.

FIXED CHARGE

This is a form of security that is granted over specific assets. Fixed charges prevent the debtor to deal with those assets without the consent of a secured creditor. A fixed charge effectively gives the secured creditor a first claim on the proceeds of a sale. The creditor is then able to appoint a receiver to realize the assets, should a default occur.

FLOATING CHARGE

This is a form of security that is given to a creditor. It covers a company’s general assets, which tend to change from time to time in the normal course of business (in the form of stocks, for example.) The company may wish to continue utilizing the assets in its business until a default occurs and the charge solidifies. Should this occur, the secured creditor may then realize the assets as a means of recovering his debt. This is usually accomplished by appointing an administrative receiver. The net proceeds of a sale are then obtained.

FRAUDULENT TRADING

If a company carries on business with the intent to defraud creditors, or any other similar fraudulent purpose, then fraudulent trading is said to have taken place. This is considered to be a criminal offense.

GOING CONCERN

This describes the basis upon which insolvency practitioners choose to sell a business. It basically means that the business will continue, jobs will be saved, and a higher price will be obtained.

GUARANTEE

This 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. Companies in a group may guarantee each other’s loans.

INDIVIDUAL VOLUNTARY ARRANGEMENT (IVA)

This describes the court ordained process by which an individual comes to an agreement with their creditors as to how their debt shall be discharged.

INSOLVENT

This describes the state of being unable to pay one’s debts when they are due.

INSOLVENCY ACT 1986 (IA 1986)

This legislation governs insolvency law and practice.

INSOLVENT LIQUIDATION

When a company goes in to liquidation at a time when its assets are not sufficient for the payment of its debts, then it goes in to insolvent liquidation.

INSOLVENCY PRACTITIONER (IP)

This is a licensed individual who is the only person allowed to act as an office holder in an insolvency proceeding.

INSOLVENCY RULES

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) apply where the Act applies. There are separate rules dealing with insolvent partnerships, insolvent deceased's estates, as well as deeds of arrangement.

INTERIM ORDER

A person who intends to propose a voluntary arrangement to his creditors can apply to the court for an interim order, which, if granted, precludes bankruptcy and other legal proceedings while the order is in force.

INVESTORS' COMPENSATION SCHEME

This is a statutory scheme that gives individual investors protection of up to 48,000 pounds in the event that authorized investment business collapses.

JUDGEMENT

Judgment is defined as either recognition of a debt by a court, or the decision given by a court at the conclusion of a trial.

LAW OF PROPERTY ACT 1925 (LPA)

This law governs all transactions dealing with property.

LPA RECEIVER

This describes an individual who is elected to take charge of a mortgaged property by a lender whose loan is in default. It is usually intended for that person to sell or collect rental income on behalf of the lender. This process is rather common in cases of a property developer’s failure.

LIEN

This describes the right to retain possession of documents or assets until a debt has been settled.

LIQUIDATION

Liquidation describes the procedure wherein a company’s assets are gathered in and realized and the liabilities are met. The surplus is then distributed to members.

LIQUIDATION COMMITTEE

The committee receives information from the liquidator and sanctions some of his actions.

LIQUIDATOR

This is the individual who is elected to deal with the liabilities and assets of a company once the resolution to wind up has been passed or compulsory winding up has been instituted.

MAREVA INJUNCTION

This is a court order that prevents the disposal of assets.

MEMBER

This is a company shareholder.

MEMBERS' VOLUNTARY LIQUIDATION (MVL)

This is a solvent liquidation process wherein shareholders appoint a liquidator to realize assets and settle all of the debts of a company in full within a one-year period.

MISFEASANCE

This describes a breach of duty in relation to the funds or property of a company by either its managers or directors.

MORTGAGE

A mortgage is a transfer of an interest in land or any other property by way of security. It is redeemable upon paying a certain sum of money.

NOMINEE

This is the individual elected to report on a debtor’s proposals for an IVA or CVA.

OFFICE HOLDER

A person who is required to be a qualified insolvency practitioner to hold the following posts: liquidator, provisional liquidator, administrator, administrative receiver, supervisor of a voluntary arrangement, or trustee in bankruptcy.

OFFICIAL RECEIVER (OR)

This is a civil servant who is employed by the DTI in order to head the regional offices. The OR’s responsibilities include covering bankruptcies and compulsory liquidations.

ONEROUS PROPERTY

This term is used in reference to contracts that are not profitable, as well is property that cannot be sold or property that might possibly give rise to a continuing liability. A liquidator might then disclaim such property.

PETITION

This is a written application to the court for relief or remedy.

POLICYHOLDERS PROTECTION ACT 1975

This act was established to provide compensation to the public in the event of an insurance company’s liquidation.

PREFERENCE

A preference is a payment in the six-month to two-year period preceding a liquidation, administration, or bankruptcy. It places a creditor in a better position than they would have been otherwise. A liquidator, administrator, or trustee in bankruptcy may recover any sums that are found to be preferences.

PREFERENTIAL CREDITOR

The preferential creditor has priority when a liquidator, administrative receiver, or trustee distributes funds in bankruptcy.

PROOF OF DEBT

This is the document submitted in an insolvency to establish a creditor's claim. It can be informal or in a prescribed form.

PROVING

A creditor with claims “proves” his debt. The documents that he utilizes to establish his claim are called his “proof.”

PROVISIONAL LIQUIDATOR

This individual is appointed by the court in order to deal with the affairs of the company until a compulsory winding up order is put in place.

PROXY

This is the authority that a creditor gives to another individual to speak and vote on their behalf.

PROXYHOLDER

This is an individual who is authorized to attend a meeting on behalf of someone else.

RECEIVER

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.

RECEIVERSHIP

The general term applied when a person is appointed as a receiver or administrative receiver over certain assets.

RECOGNISED PROFESSIONAL BODY (RPB)

This refers to an organization that is granted authority by the Secretary of State to allow its members to serve as insolvency practitioners.

RESERVATION OF TITLE OR RETENTION OF TITLE AGREEMENT

This is an agreement that delineates the sale of goods to a company. The agreement does not constitute a charge on the goods. Under the agreement, in the event that the seller is not paid and the company is wound up, the seller will then have priority over all other creditors of the company in respect to the goods or property that represents the goods.

SECURED CREDITOR

This is a creditor who has specific rights over some or all of his debtor’s assets in the event of insolvency.

SECURITY

This is a mortgage or charge over assets that is taken to secure the payment of a debt. In the event that the debt is not paid, then the lender reserves the right to sell the charged assets. A mortgage over a property is one example of a security document.

SHADOW DIRECTOR

This is an individual who, while not formally appointed as director, acts in accordance with the instructions of the directors of a company.

SPECIAL MANAGER

This court appointed individual acts in a compulsory liquidation or bankruptcy as an assistant to the liquidator, trustee, or official receiver of a company in managing the insolvent’s business. This individual need not be an insolvency practitioner.

STATUTORY DEMAND

A formal notice requiring payment of a debt exceeding £750 within 21 days, in default of which bankruptcy or liquidation proceedings may commence without further notice.

SUPERVISOR

This individual is appointed to supervise the implementation of a debtor’s proposals for a CVA or IVA once the creditors and members have approved.

TRANSACTION AT AN UNDERVALUE

This describes either a gift or a transaction in which the consideration received is much less than what has been given.

TRUSTEE

In bankruptcy, a trustee is the authorized insolvency practitioner who has been appointed to deal with the bankrupt person’s estate. In a deed of arrangement, the trustee is the authorized insolvency practitioner who is appointed to deal with the estate of the individual who has entered in to the deed.

UNSECURED CREDITOR

This is any creditor who does not hold security.

UNDISCHARGED BANKRUPT

Someone against whom a bankruptcy order has been made and who has not been discharged from bankruptcy.

VAT BAD DEBT RELIEF

This is the relief obtained in respect of the VAT element of an unpaid debt.

VOLUNTARY LIQUIDATION

When a company is placed in to liquidation by resolution of its members, then voluntary liquidation has taken place.

WINDING-UP

Also known as liquidation, winding up is the procedure whereby a company’s assets are gathered in and realized. The liabilities are met, and if there is any surplus, it is then distributed to the members.

WINDING-UP ORDER

This is the order made by the court for a company to be placed in compulsory liquidation.

WINDING-UP PETITION

This is a petition that is presented to the court. It seeks an order that a company be placed in to compulsory liquidation.

WRONGFUL TRADING

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.