- A company (or partnership) that is, or is likely to become, insolvent can be placed under the control of an administrator appointed by one of the following:
- the court - on application by a creditor, the directors or partners
- the holder of a qualifying floating charge over the assets of the business (e.g. a bank)
- the company or its directors.
An administrator's main purpose is to rescue the company as a going concern. If this is not possible, he will try to get a better result for the creditors than would be possible if the company was wound up instead of going into administration.
Failing this, the administrator will realise (sell) the company's property to make a payment to one or more secured creditors (such as the bank) or its preferential creditors, such as employees.
Can also be the administration of the insolvent estate of a deceased debtor; or a 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 - usually a bank. 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. This is sometimes abbreviated to receiver but there are other types of receiver.
The term applied when a person is appointed as an administrative receiver. Commonly abbreviated to receivership.
A licensed insolvency practitioner who takes over responsibility for a company's affairs once it is placed into administration (see above). The administrator will produce proposals, for approval by the creditors, to achieve the purpose set out for his appointment.
This is a specialist remedy, available to a secured creditor, to take control of the assets of a farmer.
A bankrupt may apply for annulment of a bankruptcy order on the grounds either that it should not have been made (e.g. because of a technical legal flaw in the application); or that all the costs and debts of the bankruptcy have been paid in full. Annulment effectively takes the position back as if the bankruptcy order had never been made; and can take place several years after the bankruptcy order was made.
Associates of individuals include family members, relatives, partners and their relatives, employees, employers, trustees in certain trust relationships, and companies that the individual controls. Associates of companies also include shareholders, directors and other companies under common control.
Bankruptcy is the process of dealing with the estate of a bankrupt. A bankrupt is an individual against whom the court has made a bankruptcy order. 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 by a trustee in bankruptcy.
A right given to a creditor to secure a designated asset of a debtor so he can dispose of it to discharge a debt if the borrower defaults; such as a mortgage over a property or a debenture over a company. A charge does not involve the transfer of possession or ownership.
Company Directors Disqualification Act 1986
Legislation brought in to consolidate enactments relating to the disqualification of persons from being directors of companies, and from being otherwise concerned with a company's affairs.
Company Voluntary Arrangement (CVA)
A procedure whereby a plan of reorganisation or composition, in satisfaction of a company's 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.
This is an agreement between a debtor and his creditors. The compounding creditors agree with the debtor, and between themselves, to accept payment from the debtor of less than the amount 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 a debtor company.
Directors or shadow directors and their associates, and associates of a company.
Report of the Insolvency Law Review Committee, chaired by Sir Kenneth Cork, upon which the Insolvency Act 1986 was substantially based.
A person appointed to take charge of assets, usually when they are subject to some legal dispute. The procedure may be used other than for a limited company, for example, to settle a partnership dispute.
A body formed to represent the interest of all creditors in supervising the activities of an administrator or trustee in bankruptcy, or in 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.
A document that either acknowledges or creates a debt. The expression is commonly used to describe a document that confers a fixed and floating charge over all the assets and undertakings of a company.
Deed of Arrangement
This is a method by which an individual may come to terms with creditors, outside formal bankruptcy. The procedure has now been almost completely supplanted by voluntary arrangements.
Deposit Protection Board
If an authorised institution such as a bank or similar becomes subject to liquidation or administration proceedings, the Deposit Protection Board will pay compensation to depositors from the Deposit Protection Fund up to certain statutory limits which increase periodically.
Disabilities of a Bankrupt
It is a criminal offence for an undischarged bankrupt to, amongst other things:-
- Act as a director or take part in the management of a limited company;
- Obtain credit of over £250 without disclosing his status;
- Trade in a name other that that under which he was made bankrupt;
- Hold certain public and other offices
A bankrupt usually receives a discharge from bankruptcy automatically no more than a year after he was made bankrupt. Discharge means he is freed from the disabilities of being a bankrupt. A discharge can be suspended by the court in cases where a bankrupt has been guilty of misconduct.
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. The disqualification may apply for any period between two and 15 years. Such a director may also consent to being disqualified for a specified period, by giving a disqualification undertaking, if he wishes to avoid the costs of a court application.
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. This transaction may be challenged either 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 from a creditor over general assets of a company, such as stock, which may change in the normal course of business. 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 the debt, usually by appointing an administrative receiver or (more usually nowadays) an administrator, and obtain the net proceeds of sale subject to the prior claims of the preferential creditors.
Fraudulent trading occurs when a company carries 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.
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 legal commitment to repay a debt, if the original borrower fails to meet his obligations. Directors may give guarantees to banks in return for the bank financing their companies.
Individual Voluntary Arrangement (IVA)
A procedure whereby a scheme of arrangement of an individual's affairs, or a composition in satisfaction of his debts, is put forward to creditors. Such a scheme, once approved, becomes under the control of a supervisor. "fast-track" voluntary arrangement can be proposed in smaller bankruptcy cases to replace the bankruptcy and the supervisor will be the Official Receiver.
Defined as a debtor 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 against a company or a bankruptcy Petition against an individual.
Insolvency Act 1986
Primary legislation governing insolvency law and practice. Many other statutes and statutory instruments are also relevant.
Insolvency Services Account
An account maintained by the Department of Trade and Industry, through which funds must be passed in compulsory liquidations and bankruptcies.
A company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and other expenses of liquidation in full.
Insolvent Partnerships Order 1994 (IPO)
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.
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, prevents bankruptcy and other legal proceedings whilst the order is in force. It is not compulsory to obtain an interim order simply to propose a voluntary arrangement.
Investors' Compensation Scheme
A statutory scheme, operated by the Securities and Investments Board, to give individual investors compensation if an authorised investment business collapses.
Law of Property Act 1925
Governs transactions in law and property. Contains statutory powers of receivers appointed under a fixed charge.
As defined by the Law of Property Act 1925, an LPA 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. An LPA Receiver may be used, for example, upon the failure of a property developer, whose borrowings will largely be secured on specific properties.
Licensed Insolvency practitioner (IP)
Person licensed to act as an insolvency practitioner by one of the recognised regulatory professional bodies. 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.
Right to retain possession of assets or documents until the settlement of a debt.
Liquidation (winding up)
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 a terminal process and is followed by the dissolution of the company.
Committee of creditors that receives information from the liquidator and sanctions some of his actions.
The Official Receiver or an insolvency practitioner appointed to administer the liquidation of a company or partnership.
Court order preventing the disposal of assets.
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 (MVL)
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.
Breach of duty in relation to the funds or property of a company by its directors or managers.
A transfer of an interest or land, or other property, by way of security, upon the express or implied condition that the asset shall be re-conveyed to the debtor when the sum secured has been paid.
Licensed insolvency practitioner nominated in a proposal for an individual or corporate voluntary arrangement to act as supervisor of the arrangement.
A liquidator, provisional liquidator, administrator, administrative receiver, supervisor of a voluntary arrangement, or trustee in bankruptcy.
An officer of the court and civil servant employed by The Insolvency Service, who deals with bankruptcies and compulsory liquidations.
Partnership Voluntary Arrangement (PVA)
The term used to describe the company voluntary arrangement procedure as applied to partnerships under the provisions of The Insolvent Partnerships Order 1994.
An individual or a legally constituted corporation.
A written application made to a Court for relief or remedy, usually for bankruptcy or winding up of an insolvent individual or company.
Policyholders' Protection Act 1975
An Act of Parliament that established the 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 made by an insolvent company or individual which places a creditor in a better position than he would otherwise have been (compared with the other creditors). A liquidator, administrator or trustee in bankruptcy may recover sums, which are found to be preferences.
A creditor who is entitled to receive certain payments in priority to floating charge holders and other unsecured creditors. These creditors include occupational pension schemes and employees.
Proof of Debt
Document submitted by a creditor to the licensed insolvency practitioner, giving evidence of the amount of the debt. Proof of debt is used only in compulsory liquidations.
The name 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.
Document whereby 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 proxy can represent a corporate body.
Form that must be completed if a creditor wishes someone else to represent him or her at a creditors' meeting and vote on his or her behalf.
Person who attends a meeting held on behalf of someone else (see above).
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. Failure to attend one's public examination can lead to an arrest warrant being issued.
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 commonly used name for an administrative receiver. A receiver may also be 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.
The general term applied when a person is appointed as a receiver or administrative receiver.
Recognised Professional Body (RPB)
An organisation approved by the President of the Board of Trade as being able to authorise its members to act as licensed insolvency practitioners.
A procedure that cancels or rescinds a winding-up order.
The process by which the Official Receiver or an insolvency practitioner is discharged from the liabilities of office as trustee/liquidator or administrator.
The date of commencement of insolvency proceedings.
Reservation (or Retention) of Title
This 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. It is a complex and continually evolving area of law.
Scheme of Arrangement
A term normally used to describe 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 creditor who holds 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 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 the mortgage of 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; for example, an undischarged bankrupt who controls the company through "puppet" directors. However, a person is not a shadow director merely because the directors act on advice given by him in a professional capacity.
An individual in a business that is not conducted through a company.
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 an insolvent's business. He does not need to be a licensed insolvency practitioner.
Statement of affairs
A document sworn under oath, completed by a bankrupt, company officer or director(s), stating the assets and giving details of debts and creditors.
A formal notice requiring payment of a debt 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.
The licensed insolvency practitioner appointed by creditors to supervise an approved voluntary arrangement.
Transaction at an Undervalue
A transaction at an undervalue can be described either as a gift or a transaction in which the consideration received by the debtor or company giving it is significantly less than that given. In certain circumstances, this transaction can be challenged either by an administrator, a liquidator or a trustee in bankruptcy.
Quite apart from its common usage, e.g. 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).
Any creditor who does not hold security. More commonly used to refer to any ordinary creditor who has no preferential rights. An unsecured creditor will be the last in the queue to receive funds in insolvency proceedings, apart from the shareholders.
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 where debt is six months old at the relevant date.
See Individual Voluntary Arrangements (IVA), Company Voluntary Arrangement (CVA) and Partnership Voluntary Arrangements (PVA).
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.
Members' Voluntary Liquidation (MVL): 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.
Order made by the court for a company to be placed in (compulsory) liquidation.
A Petition presented to the court for an order that a company be put into compulsory liquidation.
Applied to companies in liquidation where the directors have allowed the company to continue trading in circumstances where they 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.