Insolvency Glossary Of Terms

Administration Order  A court order placing a company, which 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. Administration Administration is an insolvency procedure 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 three purposes of administration are: to save the company, or if that is not possible, to achieve a better result for creditors than if the company went into liquidation, or if neither of those purposes are possible, to realise property to enable funds to be distributed to secured or preferential creditors. Administrator The person or persons appointed in relation to a company to manage its affairs and to achieve the purpose of Administration.  The persons appointed need to be licensed insolvency practitioners. Administrative Receiver A licensed insolvency practitioner appointed by the holder of a floating charge over the whole, or substantially the whole of the company’s property. An administrative receiver has wide powers including the power to carry on the business of the company and to sell the business and any other assets comprised in the security to repay the secured and the preferential creditors. (Rarely used process since Enterprise Act 2002) Bankruptcy Order An order made by the court against an individual which signifies that the individual is unable to pay his/her debts. Bankrupt An individual against whom a bankruptcy order has been made. Bankruptcy The process of dealing with the estate of a bankrupt. Bankruptcy Petition An application to the court made by a creditor (or the debtor themselves) for a bankruptcy order to be made in relation to the individual. In the case of a creditor, it is a condition that the debt owed exceeds £5,000. Charge A charge is a right given to a creditor in a legal document to have a designated asset(s) of the debtor appropriated to the discharge of the indebtedness.  This does not involve any transfer either of possession or ownership of the asset(s) subject to the charge. Company Voluntary Arrangement (CVA) A procedure whereby a plan for reorganising the company’s debts or making a composition in satisfaction of its debts is put forward to creditors and shareholders for approval. Once approved the company voluntary arrangement is under the control of a supervisor while the company remains under the control of its directors. Composition A composition is an agreement between a debtor or a company and his/her or its creditors where creditors agree with the debtor / company and between themselves to accept a lesser sum in satisfaction of their claims. Compulsory Liquidation The result of a petition having been presented to the court by a creditor and the court making an order to place a company into liquidation.  The creditor must be owed a minimum of £750.  A Compulsory liquidation is the only means by which a creditor can instigate a liquidationin relation to a corporate debtor. Creditor A person to whom an individual or company is indebted. Creditors’ Voluntary Liquidation (CVL) A liquidation of a company, driven by its directors, which is commenced by way of a resolution of its shareholders although the company’s creditors, have the right to determine who is to act as liquidator through the relevant Decision process. Debenture A document that acknowledges/creates a debt – the expression is often used to describe a legal document which gives the holder a fixed and floating charge over all the assets and undertaking of the company. The holder of a debenture is often referred to as a debenture holder and/or a secured creditor. Decision process The process whereby an insolvency practitioner (“IP”) seeks a decision from creditors of the company or an individual in relation to an insolvency appointment.  It is no longer possible for the IP to hold a physical meeting of creditors, unless requested by the requisite number of creditors.  This means that the processes formally carried out at meetings is now undertaken by written correspondence or virtual meetings. Discharge Subject to one exception (where a criminal bankruptcy order is made), the bankrupt is generally discharged from his/her bankruptcy at the end of the period of 1 year from the bankruptcy commencing.  However, it is possible for the Official Receiver or the Trustee to apply to Court to suspend the automatic discharge in certain circumstances e.g. the bankrupt has been uncooperative). The effect of discharge is to release the bankrupt from the vast majority of bankruptcy debts (note that there are certain debts which survive bankruptcy). Dividend The sum distributed to a creditor by the office holder, based upon the amount of the creditors claim and paid from the proceeds of the sale of the assets realised by the office holder.  Creditors receive a dividend on a pari passu basis (equal footing) after certain costs and expenses of the insolvency have been met. Fixed charge A form of security over specific assets preventing the debtor from legally dealing with the assets without the consent of the secured creditor. Floating Charge A form of security granted to a creditor over general assets of a company that may change over time in the normal course of business (e.g. stock). The entity that has granted the floating charge can continue to use the assets in its business until an event of default occurs and the floating charge crystallises. Guarantee A legal commitment to repay a debt if the principal borrower fails to repay. It is common for directors to provide personal guarantees to lenders who provide funding to their company, especially in situations where the company has little or no security it can provide directly to the lender. Individual Voluntary Arrangement A procedure whereby a plan for reorganising a person’s debts or making a composition in satisfaction of its debts is put forward to creditors for approval. Once approved the company voluntary arrangement is under the control of a supervisor. Insolvency/Insolvent Insolvency/Insolvent is defined as having insufficient assets to meet all debts (balance sheet test) or being unable to pay debts as and when they fall due (cash flow test). Interim Order An individual who intends to propose a voluntary arrangement to his creditors can apply to the Court for an Interim Order (“IO”).  If an IO is granted by the Court this precludes bankruptcy and other legal proceedings continuing or commencing against the debtor while the IO is in force.  An IO is used to provide the debtor with time to prepare and propose an Individual Voluntary Arrangement. Licensed Insolvency Practitioner A person authorised by the Law Societies, the Insolvency Practitioners Association or one of the Chartered Accountancy bodies. A licensed insolvency practitioner is the only person who may act as an office holder. Liquidation The process where the assets of a company are realised and distributed to satisfy, in so far as possible its liabilities. In the event of a surplus after payment of all costs and liabilities plus statutory interest, this will be distributed to the shareholders. Meeting of Creditors The various insolvency procedures provide for the convening of meetings of creditors in order for creditors to participate in the insolvency process. Member The shareholder of a company or a partner of a Limited Liability Partnership. Members’ Voluntary Liquidation (MVL) A solvent liquidation where the shareholders of the company pass a resolution to place the company into liquidation appoint a liquidator to realise assets and settle all the company’s debts in full, and the surplus after repayment of debts is distributed to the shareholders. Nominee A licensed insolvency practitioner nominated by an individual or a company in a proposal for an individual or company voluntary arrangement to act as supervisor of the arrangement. Office Holder An office holder is a liquidator, provisional liquidator, administrator, administrative receiver, supervisor of a voluntary arrangement or trustee in bankruptcy. Official Receiver An official receiver (OR) is an officer of the court, Civil Servant, member of the Department for Business Innovation and Skills’ Insolvency Service. The OR deals with bankruptcy and compulsory liquidations although the Secretary of State can appoint a licensed insolvency practitioner to act as the liquidator or Trustee in Bankruptcy replacing the OR. Creditors can also seek to replace the OR via a meeting process. Petition A petition is a written application to the court for relief or remedy. Preferential Creditors Creditors whose debts are preferential as defined in Schedule b of the Insolvency Act 1986. Proof of Debt A document submitted by a creditor to the appointed office holder or the OR that evidences the creditor’s debt. Provisional Liquidator This is the name given to a licensed insolvency practitioner appointed by the Court to safeguard a company’s assets after presentation of a winding up petition but before a winding up order is made by the court. Proxy Authority given by a member or a creditor to another person (the proxy holder) to represent the member/creditor at a meeting of members/creditors on a specific form enabling them to attend, speak and vote on behalf of the member or creditor.  The proxy may be a general proxy, giving the proxy holder discretion as to how he/she votes, or a special proxy requiring him/her to vote as directed by the member/creditor. Retention of Title (also referred to as Reservation of Title) (“ROT”)  A provision under a contract for the supply of goods which purports to reserve title in the goods with the supplier until the goods have been paid for even though the goods have been delivered to the purchaser. Security A charge or mortgage over assets that secures the payment of a debt. If the debt is not repaid, the lender with the benefit of the security has a right to take control of and sell the charged assets. Statement of Affairs The document submitted to the office holder by a debtor (where personal insolvency appointment) or by the directors of the company (where corporate insolvency appointment) which details all the assets and liabilities of the debtor/company.  The amounts included are provided to advise the IP and creditors of the likely realisations from the assets and detail the estimated quantum of the known and contingent creditors. Statutory demand A formal notice requiring payment of a debt exceeding £750 within 21 days, in default of which liquidation proceedings may be commenced without further notice.  A similar can be used for an individual where the amount owed is in excess of £5,000.  A statutory demand cannot be used where a debt is disputed (it is considered by the court to be an abuse of process). Supervisor A supervisor is the licensed insolvency practitioner appointed by creditors to supervise a voluntary arrangement approved by creditors. Trustee Although this term is used in the context of various insolvency procedures, in relation to an individual debtor the trustee is the trustee in bankruptcy, either the Official Receiver or a licensed insolvency practitioner appointed by the Secretary of State or the estate creditors. Unsecured Creditor A creditor who does not hold security in relation to the debtor. Winding up Order An order made by the court for a company to be placed into compulsory liquidation.