This is here to help you with the terminology used in the world of ‘insolvency’. Hopefully this will help you make the right decision for you.
Commonly used terms in insolvency:
If a company falls into financial difficulties the directors or a third party will sometimes appoint an Administrator to run the company. It provides protection to the company from creditor action. This is a temporary measure when the Administrator can determine whether or not the company can trade out of its problems.
A person who controls a company which has gone into Administration. He / she has overall control of the company. The Administrator is a Licensed Insolvency Practitioner appointed by the Court.
An Annual General Meeting is where the directors share information about the past year and also give forecasts for the future. Shareholders of a company are allowed to discuss their opinions and can vote for any eligible changes which can be made such as auditors and directors.
This is a term used when a debt has not been paid on time and the payments become overdue. If the debt is not paid then action may be taken to reclaim the money.
Anything that is owned by the individual or company which has a value either now or will have a value at some time in the future. Examples include vehicles, shares, money in the bank or in hand, property and book debts. Less obvious assets may be intangible, such as goodwill, patents, “brands” or valuable contracts.
A bailiff is someone who works on behalf of the courts to collect debt. There are several types of bailiffs whose powers vary and as a result they act differently. Bailiffs can be instructed to seize goods for payment of debts if an individual or company fails to pay a debt with the court (such as through a County Court Judgement or CCJ): they can also be used to repossess property.
This is an option a person may use if they do not pay their debts as and when they become due. He / she would lose control of their assets and would not be allowed to become a company director for the period of bankruptcy. Some occupations specifically indicate that becoming bankrupt constitutes a breach of employment terms so we recommend that you read your employment contract. Bankruptcy will also affect your credit rating.
A court order making an individual bankrupt.
Bankruptcy restrictions order or undertaking
A bankruptcy restriction order or undertaking is where a restriction is made against an individual. This could result in bankruptcy restrictions continuing for a period of between 2 and 15 years.
BIS - The Department for Business, Innovation and Skills (formerly DTI – Department of trade and industry)
Is a government agency working to create the conditions for business success and help the UK respond to the challenge of globalisation. They promote enterprise innovation and creativity. They run the The Insolvency Service in England and Wales and are the regulatory body for many insolvency practitioners. They also help in many employment issues such as redundancy.
These are monies that are owed to an individual or company for goods supplied or services provided. They are “assets” – see above. Individuals or companies who owe the money are referred to as Debtors.
County Court Judgement (CCJ)
A County Court Judgement is a court action where an individual or company have been taken to court for non-payment of debts. The court will order the debt to be paid within a period of time. If the debt remains unpaid further action can be taken to recover it – eg use of a bailiff.
All Limited companies and Plc’s (Public limited companies) are registered here. All information is stored and is available to the public. Companies House also incorporate and dissolve companies.
This is an order made by the court giving a charge over an interest in a property in respect of an unpaid debt. The charge is like a mortgage and the debtor will not be able to sell or re-mortgage his / her home without first repaying the debt. Application to the court for an order forcing the sale of the property on the back of the Charging Order can sometimes be made but there have to be exceptional circumstances for this to be successful.
This is an assessment of credit worthiness used by banks and lenders, expressed as a score. It can relate to either individuals or companies and is based on a combination of factors but mainly past credit history. An application for a loan or credit may stand or fall depending on the credit rating. Whilst taking credit and paying promptly will have a positive impact on a credit rating, the existence of CCJ’s or any defaults on paying debts will have a negative impact.
Individuals or companies who are owed money. It can also be someone who will (or may) be owed money in the future due to some obligation that has already been entered into.
Creditors petition (bankruptcy)
A person can only be made bankrupt if the debt is unsecured and for a fixed sum that he / she may appear unable to pay. A creditor owed more than £750 can petition to make an individual bankrupt. Bankruptcy can also be petitioned for by a group of people if the combined sum due to them is more than £750. A debtor can also make him / herself bankrupt if unable to pay. The proceedings will normally take place a local county court with bankruptcy jurisdiction. For more information see http://www.insolvency.gov.uk
Company Voluntary Arrangement (CVA )
This is a formal, legally-binding agreement made by a company with its creditors when there are cash flow problems. It is a route usually taken by Directors who feel their company has a viable future and are willing to work hard to keep it alive. If this route is taken an arrangement is entered into with creditors to repay a percentage of the sum owed to them over a period of time. The Directors will keep control of the Company and continue to trade as normal. In some cases it is a means of buying time until a known event (eg completion of a contract or the sale of an asset) when full repayment of creditors is anticipated.
Creditors Voluntary Liquidation (CVL)
The corporate equivalent of bankruptcy, but in the case of a limited company it will cease to exist once the liquidation is completed. It is feasible in some cases that all or part of the business will continue to exist but owned by a new entity (see pre-pack administration / liquidation). The company will stop trading, all contracts will be terminated and assets sold. The shareholders of the company will decide to liquidate the company and will enlist the services of an insolvency practitioner to complete all the necessary arrangements.
These are individuals or companies that owe money to a third party for goods or services provided.
Debtors petition (bankruptcy)
This is where an individual declares themselves bankrupt by visiting their local county court and petitioning for bankruptcy.
Debt Relief Order
An alternative (and similar in many ways) to bankruptcy but where the amount of debt is smaller They are suitable for people who do not own their own home, have little surplus income and assets and less than £15,000 of debt. – for more information see http://www.insolvency.gov.uk
These are monies that are owed to an individual or company for goods supplied or services provided.
Directors are responsible for the running, management and control of a company. The limited liability of a company ensures directors are protected from personal risk, providing that they operate within the law. They must act professionally and correctly to ensure they have this protection.
If a person is declared bankrupt or other insolvency offences have been committed it is illegal for that person to be the director or manager of a company and may be barred by the The Department for Business, Innovation and Skills (BIS).
A company may apply to the registrar to be struck off the register and dissolved. The company can do this if it is no longer needed. In order to commence dissolution proceedings the company must not have been trading for at least three months. The company can then be dissolved. This will legally break up a company that no longer wishes to trade.
This is used by landlords as a tool where there is unpaid rent. Where a landlord has agreed a payment plan for rent and this is not adhered to they have various options and can instruct an agent to enter the property and remove goods or assets to cover the value of the debt. This can usually be carried out within one week of a missed payment. They do not need a court judgement to implement these actions.
A way of raising finance using book debts as security. A company issues an invoice for goods / services provided. The factoring company will immediately advance to the company a pre-agreed percentage of the value of the invoice. The company receives the remaining balance of the invoice (less the factors charges) when the customer ultimately settles the invoice. This is an ideal product for businesses which are expanding, profitable and offer their customers credit terms. Factoring can also be used when companies are involved in international trade. Confidential Invoice Discounting is a similar product.
Fixed and Floating Charge
This is a popular form of security using company assets. The legal document usually used to create such a charge is a debenture.
- A fixed charge generally attaches to fixed assets such as property, plant and equipment. They are specifically mentioned in the document of charge and the company cannot sell the asset without the permission of the lender. Factors can take a charge over book debts.
- A floating charge attaches to any assets not already is usually secured by current assets – stock, work in progress, un-factored debtors, cash, as well as fixtures and fittings, vehicles or assets. The company can deal with these assets in the normal course of business, replacing them whenever necessary without any reference to the charge-holder
- A floating charge attaches only when it “crystallises”. This occurs, for example, if a bank calls in its lending and demands full repayment. Once the charge crystallizes the company would be unable to make use of the assets without the permission of the charge holder.
Where trade continues without any means of repaying the debts and with the intention of defrauding creditors.
Where a company is trading and making a profit.
HMRC – Her Majesty’s Revenue & Customs
A government department who regulates and collects customs and duties for instance VAT and PAYE. These function were historically dealt with by separate departments – HM Customs & Excise and the Inland Revenue.
Income payments agreement
Within bankruptcy, this refers is an agreement entered into with an individual’s trustee where the individual agrees to pay him or her part of their wages, salary or any other income. This would be for an agreed period of time.
An insolvency practitioner is usually an accountant or solicitor who has trained and specialised in insolvency. They are authorised by the Secretary of State or other recognised professional bodies.
This is when a company or individual cannot afford to repay their debts as and when they are due, or whose liabilities are greater than their assets.
If a person is proposing to do an IVA they can apply for an interim order in court. This protects them against any legal action which may be taken against them by anyone they owe money to.
IVA - Individudal Voluntary Arrangement
An IVA is a formal agreement with all the unsecured creditors you owe money to. It is an alternative for individuals to go into banruptcy.
Joint and Several Liability
If one or more person enters into an agreement (such as a mortgage or rent agreement), then all those named on the agreement are liable for the full amount. An example of this would be a joint mortgage where the mortgage company can pursue either or both people named on the mortgage for any amounts outstanding.
A form of security (eg a mortgage) to ensure payment of a debt.
Debts and obligations of the company or individual. An example of these would be bank loans, mortgages, credit cards or store cards.
A company with its own legal identity. This ensures the directors and shareholders are not liable for any of the company’s actions providing they are legal and proper.
Owners of a company have their liability for the company’s debts limited. Their liability is limited to the paid-up value of the shares they own i.e. it is limited to the amount they agreed to pay for the shares when they purchased them.
When a company becomes insolvent, then it ceases to trade as it is not able to pay its debts as and when they fall due. It is then liquidated, i.e. its assets are sold and the resulting funds utilised to pay at least some of its debts. If the creditors have been paid in full any remaining funds are passed to the owner.
Is the person, other than the official receiver, responsible for dealing with the winding up of a company.
Contributions are paid and held to build up a fund to pay retirement pensions.
This is a letter written by someone guaranteeing the payment of money lent to a third party (maybe a limited company). So if the company defaults on the repayments then the lender will call on the personal guarantee to repay either part or all of the remaining debt.
A public company may offer to sell its shares to the public. A public company must satisfy Companies House that at least £50,000 worth of shares have been issued and that each share has been paid up to at least one quarter of its face value.
A creditor who is entitled to receive payments prior to unsecured creditors. These include employees and occupational pension schemes.
An individual need not attend a meeting. They can appoint a third party to attend and vote in their place – a proxy.
A Receiver is appointed by a lender (usually a bank) with a charge or mortgage over the company’s assets. The Receiver then sells the assets of the company in Receivership in order to repay the debt.
Redundancy is a form of dismissal. It could be that the company is down sizing or closing a department or closing the whole company. The staff are then made redundant as there is no longer available employment.
Own stakes in Limited Companies. Shares can be purchased on the open market if it is a quoted PLC. They can vote on how a company is run and they earn a share of the profits as a dividend.
Statement of Affairs
This is a statement of assets and liabilities of a company at the date of its winding up, Receivership or Administration and is prepared by the directors with the assistance of a licensed Insolvency Practitioner.
Are owners of small businesses. With few if any employees.
When an individual or company enters into a Voluntary Arrangement a Supervisor of the Arrangement is appointed. The Supervisor ensures that contributions are made as they fall due and kept up to date. Failure to keep the contributions up to date could result in the Supervisor defaulting and failing the Voluntary Arrangement and this could lead to liquidation or bankruptcy.
The Trustee in Bankruptcy is either the Official Receiver or an Insolvency Practitioner and will take control of your assets. The Trustee’s main objective is to sell these assets and share the proceeds among the creditors.
Is the money a company takes for its services before any expenditure is deducted. It is not the profit of the company.
A creditor who does not hold security against an asset (a mortgage is a secured creditor). Some unsecured creditors may be preferential creditors.
VAT – Value Added Tax
Is a duty levied on goods and services which are liable for VAT. If you run a business you will usually have to register for VAT if your taxable turnover exceeds a level set by the Government.
WUP – Winding Up Petition
A creditor can apply for a WUP to be heard if the debtor does not pay the money due to the creditor. This could lead to the compulsory winding up or liquidation of the company or partnership.