The ultimate glossary for insolvency terms
Accountant in Bankruptcy (Scotland): This official oversees the entire insolvency procedure and acts as a trustee in bankruptcy where a licensed insolvency practitioner has not been nominated. They can only act in personal insolvency and will not take corporate insolvency appointments.
Administration: Formal insolvency process that puts the company under control of an administrator and protection of the court. Can be initiated by directors, shareholders or even floating charge holders. The administration purpose is to rescue the company and if the owners can turn around. If not, the business will be closed and company assets sold likely resulting in liquidation.
Administration Order: This refers to a court order against a business, placing it into administration. This order is initiated following a petition by the company, directors or a creditor. The purpose is to preserve the business and company assets to allow a reorganisation and protect from further legal action.
Administrative Receiver: The administrative receiver refers to the appointment of a receiver to control the company assets. They are, generally, appointed by floating charge holders to recoup debts and sell the assets if needed. It’s worth noting, administrative receivership is increasingly rare.
Administrator: The administrator is court appointed to control the company finances upon administration. The administrator does not become a director, but acts as an agent of the company without personal liability. Any company actions must be sanctioned through the administrator.
AGM: An AGM, or annual general meeting, is held for shareholders to voice any concerns and directors to share information from the past year and forecasts for the future. This should be held every year.
Arrears: This is a term that is used when a company or individual have not paid any invoices or made payments for debts that have built up. It’s likely the debt holder will take action if arrears accrue for too long.
Assets: The assets are property owned by the debtor (can refer to a company or individual) that holds value – such as stock or a house – and will be sold upon insolvency to recoup losses for creditors.
Associate: In insolvency law, an associate is broadly someone who is a relative, business partner and employee of the individual in question.
Bailiff(s): Enforcement officers (EO), colloquially known as bailiffs, are legally authorised to collect debts by the county courts on behalf of company creditors. They can remove assets and sell on to repay any debts owed.
Balance Sheet Test: set out by the Insolvency Act 1986, the Balance Sheet Test can be used to determine whether a business is insolvent. The Balance Sheet Test looks at whether the value of the company’s assets are less than the liabilities of the corporation.
Bankrupt: An individual who has been declared bankrupt following a bankruptcy petition being presented against them personally.
Bankruptcy: Bankruptcy is a process that involves an individual who cannot pay their debts and make realistic repayments as they fall due. Throughout the process, an individual will lose control of their assets, the process will negatively affect their credit rating and they will be unable to hold the position of director during the period. More information on bankruptcy can be found here.
Bankruptcy Order: An order is made against an individual stating that they cannot pay their debts as they fall due.
Bankruptcy Petition: A petition made to the courts by a creditor, or even the debtor, for a bankruptcy order to be placed against the particular individual. For a creditor to submit the application, they must be owed a sum of £5,000 or more.
Bankruptcy Restriction Order (BRO): A bankruptcy restriction order is an extension of the penalties of bankruptcy beyond its normal term. A BRO will prevent you from obtaining credit and acting as a director for the duration of up to 15 years. A BRO is granted by the court where there has been serious misconduct such as concealing assets before you are made bankrupt.
Bankruptcy Restriction Undertaking (BRU): A bankruptcy restriction undertaking has the same effect of a BRO. The main difference is that it has been given voluntarily to avoid court proceedings and will usually have a shorter term.
Bond: A bond, or insurance cover, is required by a licensed insolvency practitioner to take insolvency appointments. Typically, this bond is payable from the estate.
Bridging Loans: A bridging loan is a form of short term finance, usually used while more long term finance is secured. They are often used by property developers after purchase of properties at auction until a formal mortgage is secured. The loans are generally large with a high interest rate, so should not be relied on in the long term.
Budget: A budget takes into account annual expenses – including one-off purchases – sales and forecasts to produce a realistic budget for improving business.
Business Rates: Business rates refers to tax on non-domestic properties – such as shops, offices and pubs. Your local council will send business rates in February or March. Business rates fall due at the start of the financial year, but can be paid monthly by direct debit.
Capital Allowances: Capital allowances are forms of tax relief on certain capital expenditures. The objective is to claim back a cost of expenditure against your company’s taxable profits or income, thus reducing your tax bill.
Capital Distributions: In a members voluntary liquidation, assets are distributed as a capital distribution, rather than opposed to income where they would be subject to dividend tax. Capital distributions instead attract capital gains tax and may be subject to entrepreneurs relief.
Capital Expenditure: Capital expenditure refers to monies spent by a business to buy, maintain or even improve physical and fixed assets, including land, buildings and equipment.
Capital Gains Tax: The capital gains tax is tax on any profit from selling or disposing of a company asset that has, subsequently, increased in value. The gain from the increase is taxed, not the overall monies received.
Cash Flow Test: The cash flow test is another test of insolvency under the Insolvency Act 1986. The cash flow test measures whether a business is able to pay its debts as and when they fall due and how long the debts have been overdue.
Charging Order: A court order for payment of the disposal of an asset, most commonly freehold property. A restriction is also generally granted allowing the holder of the charging order some say over the disposal of the property.
Companies House: Companies are registered at Companies House, which stores and makes information available to the public. Failure to maintain the public register of data for a company can result in fines or the company being struck off the register.
Company Dissolution: The company is dissolved and is no longer active on the the companies house register.
Company Strike Off: Company strike off can be voluntary or compulsory. A voluntary strike off should only be applied for if the company has paid all of its debts, including salaries due to staff and board members. Compulsory strike off is where documents have not been filed with companies house and action is being taken to remove the company from the register. In either circumstance, if the company is struck off without paying its debts, directors may face disqualification and personal liability under new insolvency legislation.
Company Voluntary Arrangement (CVA): A CVA is a contractually binding agreement between company and creditors for the business to repay creditors only what they can afford. A CVA is often used to restructure the business and requires approval of 75% of creditors voting on the proposals.
Compensation Order: Those facing director disqualification can also be subject to a compensation order. This is a financial penalty requiring a contribution to the insolvent estate or directly to specific creditors, for which a director is personally liable.
Composition: A composition is a formal agreement between the debtor and their creditor/s, where they agree to accept a lesser sum.
Compulsory Liquidation: This insolvency procedure results in the closure of the company due to the submission of a winding up petition. In compulsory liquidation, a company is forced to ceased trading and all staff are immediately made redundant.
Connected Party: A connected party is similar to an associate, but refers instead to a company. A connected party can be an associate of the director as well as another director or shareholder of the company.
Controlled Goods Agreement (CGA): A CGA refers to an agreement for those that cannot pay a bailiff’s demands immediately, but can pay back in installments. The bailiff will take control over the goods to cover the debt value, as well as fees and interest, until the time you have repaid all debt owed. If the debt is not paid, the goods will be removed and sold at auction.
Corporation Tax: Corporation tax is applied to all limited companies in the UK, referring to a tax on profits earned throughout the financial year.
County Court Judgement (CCJ): A CCJ is a popular option for recovering monies owed and is the first legal step for recouping debt owed. A creditor will petition for a CCJ and, once granted, confirms the debt is legally due by your company and can be enforced upon.
Court Appointed Receiver: This does not refer to an insolvency procedure, but involves a receiver (who does not have to an IP) appointed to control the company assets when they are subject to litigation, preserving them until the outcome of the case.
Court Liquidation (Scotland): Court liquidation is the process of placing a company into liquidation through either the local sheriffs court or the court of session.
Credit Report: A credit report provides extensive detail on an individual’s (or business) credit history. It’s worth noting entering an personal insolvency procedure will negatively affect your credit report, however corporate insolvency will not unless you have provided guarantees.
Creditor(s): A creditor is a person, or business, to whom money is owed.
Creditors Petition (bankruptcy): When a creditor is owed £5,000 or more, they can submit a bankruptcy petition against an individual.
Creditors Voluntary Liquidation (CVL): A CVL is initiated by the directors and shareholders of a company, looking to liquidate a business as they are unable to pay their debts. It is a voluntary process often used to avoid compulsory liquidation.
Cross Guarantee: A cross guarantee is often used in a group of companies as a form of security. The effect of this is to make all companies under the guarantee jointly and severally liable for the debt. Proper advice should be obtained as if the loan is defaulted on, all of the companies could be forced into formal insolvency.
Debt Management Plan: A debt management plan is an agreement for a monthly repayment with an individual’s creditors, usually negotiated through an intermediary holding an FCA registration. Unlike IVAs, debt management plans can last much longer, are not legally binding and creditors may still apply interest to the debt.
Debt Relief Order: A debt relief order, colloquially known as bankruptcy lite, is available to debtors with little income, no assets and a limited amount of debt. The process is much cheaper and was introduced to make debt relief more accessible to those on low incomes.
Debtor: A debtor is a company or individual that owes you money for services, but have not yet paid.
Default: A default is the failure to meet the legal obligations of a debt due, and the payment deadline has passed. Defaults are most often used when referring to your credit rating.
Directors Disqualification: Individuals who are registered as or have acted as a director of a company, and acted to the detriment of creditors can be barred from acting as director for a period of 2-15 years.
Directors Investigation: If a company enters an insolvency procedure, a director’s investigation will take place, establishing if the director did act in the best interests of the business.
Director’s Loan Account (DLA): A DLA is a record detailing the transactions between a business and their directors. Cash withdrawals and personal monies used for the purposes of the company are also taken into account.
Discharge from bankruptcy: Discharge from bankruptcy refers to the date your are discharged from the restrictions of bankruptcy. This is automatically 1 year after the bankruptcy order has been made unless it is suspended for not cooperating with the official receiver. It is important to note that any assets as at the date of bankruptcy will continue to be sold by the trustee or official receiver.
Disqualification Order: A disqualification order is the result of the insolvency service taking legal action to secure disqualification of a director. If a disqualification order is made, it is likely this will be accompanied by a costs order for the insolvency service’s legal costs.
Disqualification Undertaking: A disqualification undertaking is where a director has agreed to be disqualified in order to avoid court action. In doing so they are less likely to be subject to a compensation order and the term of disqualification is generally shorter.
Dissolution: The action of formally closing a company.
Distraint: Similar to a CCJ, distraint allows HMRC to instruct HCEOs to take control of assets to the value of the outstanding debt. However, through distraint, this can be done without first going to court.
Dividend: A sum of money paid by a company to the shareholders or directors from the profits, as long as there are substantial profits available.
Due Diligence: This term refers to a detailed appraisal a prospective buyer takes of a business, establishing the assets exceed liabilities and evaluate the future potential.
Entity: A company that has a legal and separate existence.
Entrepreneurs Relief: Entrepreneurs relief is a form of tax relief on the disposal of a business, or shares on any capital gains in its value, allowing a reduced tax rate of 10%. It is often necessary to place a company into members voluntary liquidation in order to claim this relief.
Equity: Equity can have somewhat varying meanings, but can refer to the value of shares issued by a business. It can also refer to the value of an asset after deducting the value of any secured lending against it.
Factoring: Factoring is a form of asset based lending provided by financial institutions, whereby a company will hand control of collecting payment from those owing debts to a third party factoring company. The factor will then advance a percentage of these funds to the company. In exchange, the factor has first charge over any funds collected for balances due to them.
Fixed Charge: A fixed charge is held over specific assets, and the debtor is not able to sell those without the consent of the secured creditor.
Fixed Interest Rate: The interest rate of a loan does not fluctuate during the fixed period of the loan.
Floating Charge: A floating charge is less secure than fixed, but more flexible. A floating charge is held over the general assets of a company that may change in time, such as stock, equipment etc. In the event of a default, the floating charge will become enforceable allowing the creditor to appoint an administrator.
Franchise/Franchisee: A franchise refers to the process of an established business allowing another to utilise their model and branding. The franchisee is the business benefiting from the use of the model.
Fraudulent Trading: Continuing to trade when there is no hope of the company repaying debts, and with the intention to defraud creditors.
Forfeiture (relief): Landlord’s rights provide landlords with the power to forfeit a lease, should the business fall into rent arrears. They can enter the premises and take back the property whilst the tenant is not present.
Gazette: The gazette can refer to the London, Edinburgh or Belfast gazette, depending on the locality of the insolvency. Insolvency appointments must be advertised in the gazette as a matter of statute along with other formal notices.
Going Concern: A company can operate as a going concern if they believe operations are able to continue in the foreseeable future. The directors must then provide accurate financial statements to ensure the going concern is appropriate.
Gross Interest: This is the interest paid on investment, security or deposits before taxes and additional charges are then deducted.
Guarantee: A guarantee is a legal obligation to repay a debt, if the principal borrower has failed to do so. Often, directors provide personal guarantees to lenders.
High Court Writ: A high court writ provides high court enforcement officers with the power to visit your premises and remove goods, to the value of the debt and the officers fees.
HMRC: HMRC or Her Majesty’s Revenue and Customs are the government body tasked with collecting taxes and regulating PAYE, VAT and more.
High Court Enforcement Officers (HCEO): HCEOs are authorised by the high court to recover debts owed, and are legally entitled to enter your premises and take goods to the value of the debts.
Illegal dividend: An illegal dividend is where a distribution is made to shareholders of the company, without sufficient profit reserves to cover the dividend. These are repayable if the company enters formal insolvency and can also arise for deficiencies in the process of declaring a dividend.
Individual Voluntary Arrangement (IVA): An IVA refers to an agreement between an individual and their creditors to make monthly payments for debts owed. An IVA requires the approval of 75% of creditors.
Informal Agreements: Informal agreements are between the debtors and their creditors, but are not legally-binding. Therefore, both parties are more vulnerable.
Insolvent: An individual or company is declared insolvent when they are unable to pay debts owed, and the liabilities exceed their assets.
Insolvency Act 1986: The Insolvency Act 1986 is the legal platform that outlines all matters involved in corporate and individual insolvency in Scotland, England & Wales.
Insolvency (Northern Ireland) Order 1989: The legal platform that outlines all matters involved in corporate and individual insolvency in Northern Ireland.
Insolvency (England & Wales) Rules 2016: The rules setting out the conduct of insolvency appointments in England and Wales.
Insolvency Rules (Northern Ireland) 1991: The rules setting out the conduct of insolvency appointments in Northern Ireland.
Insolvency (Scotland) Rules 1986: The rules setting out the conduct of insolvency appointments in Scotland.
Insolvency Practitioner (IP): A licensed insolvency practitioner supervises personal and company insolvency, and can act as liquidator, trustee in bankruptcy, an administrator and a nominee and supervisor in the case of a voluntary arrangement.
Interim Liquidator (Scotland): An interim liquidator is appointed by the court when a winding up order is granted. They will arrange a meeting with the creditors to appoint a liquidator to supervise the procedure.
Interim Order: A person applying for an IVA can request an interim order to protect them from any further legal action from their creditors or lenders whilst the proposal is being considered.
Investigating Accountants: These accountants are appointed by lenders to check your accounts, forecasts and marketplace. They will look to see if the debt is secure.
Invoice Finance: Invoice finance is a quick and popular form of obtaining money by using your invoices as assets, whereby lending is organised against amounts raised in said invoices. See also factoring.
Joint and Several Liability: All parties subject to the agreement and liable for the full balance of the debt. It is a common misconception that the debt should be split equally, but this is incorrect.
Lender: A lender can refer to a company, or individual, that provides funds with the expectation they will be repaid in full.
Liabilities: Liabilities are things that are owed to someone, such as loan payments, debts etc.
Lien: A lien refers to the right to ‘hold onto’ assets or other possessions until the debt owed is settled.
Limited Company: A limited company is a legal entity which has been appropriately registered at companies house.
Limited Liability: Limited liability means that liability is limited to the investment and guarantees provided, limiting the responsibilities to make repayments should a company fall into any financial difficulties.
Liquidation: Liquidation refers to the complete closure of a company. The company assets will be distributed and sold to repay creditors, with the business also struck off the register at Companies House.
Liquidator: The liquidator is responsible for supervising the company liquidation procedure, and must be a licensed insolvency practitioner.
Member: The member can also be thought of as the shareholder of a business. Alternatively, a partner in a limited liability partnership.
Members Voluntary Liquidation (MVL): An MVL is a voluntary process undertaken by the shareholders of a solvent company, looking to release cash in an efficient manner. After an MVL, the proceeds will go to shareholders.
Moratorium: A moratorium provides breathing space to individuals or partners, referring to a period where certain activity – such as further legal action – is not allowed.
Nominee: A nominee is where the insolvency practitioner has reviewed a proposal for an IVA or CVA, and submitted this to creditors with their report on the prospects of the successful implementation of the arrangement.
Notice of Intent: A notice of intent is a document filed in court, detailing a company’s decision to appoint an administrator in an attempt to rectify their financial issues.
Office Holder: An office holder is an umbrella term for a liquidator, provisional liquidator, administrator and administrative receiver. Also can be a supervisor of a voluntary arrangement, or a trustee in the case of bankruptcy.
Official Receiver (OR): The official receiver is a civil servant who takes on the initial appointments on compulsory liquidation or bankruptcy matters. Interestingly, the official receiver is not a licenced insolvency practitioner and does not need to pass the formal examinations to achieve this status.
Overtrading: Overtrading occurs when a business grows at a huge rate and is unable to meet expectations and deliver on contracts due to the lack of available resources.
Partnership Voluntary Arrangement (PVA): A partnership voluntary arrangement is an agreement with a partnership’s unsecured creditors to make repayments for debts owed. Partners put together a proposal and submit to creditors, with this likely to provide higher returns for creditors.
PAYE: PAYE refers to pay as you earn and is a government scheme, whereby tax is deducted from your monthly wage and paid for by your employer. Therefore, individuals do not have to calculate their own tax and national insurance payments.
Personal Guarantee: A personal guarantee is a tool used by many lenders to guarantee their debt will be paid by asking the director or partner to personally guarantee the debt. Should the company enter insolvency, the lender will call on the director/partner to make repayments.
Petition: A petition is submitted to the court, and is a written application for remedy or relief.
Phoenix Company: A phoenix company is a ‘new’ company, rising from the collapse of another through insolvency. The ‘new’ business trades in the same or similar activities to the one previous.
Preference Payment: A preference payment is where one or more creditors are repaid at the expense of the general body of creditors. These transactions can be reversed by the officeholder, particularly where a connected party benefits from the transaction.
Preferential Creditors: Preferential creditors are reimbursed before any unsecured creditors and floating charge holders. Company employees are regarded as preferential creditors for their holiday pay and wage arrears up to £800.
Pre-Pack Sale: Pre-pack can refer to any pre-package insolvency sale, typically used via liquidation and administration. The pre-pack sale creates a seamless transfer of company assets and employees.
Proof of Debt: A proof of debt is submitted by a creditor, to the insolvency practitioner, to formally claim for the amounts they are owed.
Provisional Liquidator (Scotland): A provisional liquidator, or licensed insolvency practitioner, is appointed by the court to preserve the company’s assets whilst a winding up petition is pending.
Proxy Form: A proxy form to allow an entity to be represented by a third party rather than attending a meeting them self.
Receivership: Receivership is an insolvency procedure initiated by creditors when a company defaults on debt repayments to a secured creditor. Receivers will sell the assets and, generally, the company will be liquidated.
Release: A receiver or licensed insolvency practitioner is discharged from the liabilities of office.
Secured Creditor: A secured creditor is the highest class of creditor and, therefore, holds priority of payment during insolvency. They hold security over the company’s assets.
Sequestration (Scotland): This is a Scottish term referring to the bankruptcy of an insolvent estate of an individual or a partnership.
Scheme of Arrangement: A scheme of arrangement is a court-approved scheme between a company, shareholders and creditors. The scheme helps a company restructure their debt.
Shadow Director: A shadow director does not hold the official status of a director, but takes actions regarding the company as if they were a director.
Shareholders: Shareholders are owners of a business, have bought shares or have a stake in the limited company.
Sole Trader: A sole trader is an individual business owner who owns all profits and tax, but is also personally liable for any business debts should the company fall into tax arrears.
Statement of Affairs: The statement of affairs is submitted by the office holder to a debtor, or submitted by the company directors, detailing all company assets and liabilities.
Statutory Demand: A statutory demand is the precursor to a winding up petition, and is the final ultimatum of payment due to your creditors.
Tax Arrears: Tax arrears are defaults on payments for taxes, such as VAT and PAYE.
Transaction at an Undervalue: The transaction at an undervalue is the undervalue of the sale of an asset, or giving away assets prior to formal insolvency. These transactions can be reversed by the appointed office holder.
Trustee (bankruptcy): A trustee is an individual that holds trust for another. In bankruptcy, a trustee controls the property of the bankrupt individual.
TUPE: Or, Transfer of Undertakings (Protection of Employment) refers to employment law that applied when a business merges or changes hands.
Unlawful dividend: See illegal dividend.
Unsecured Creditor: An unsecured creditor is a creditor that does not hold security over a debt, and the creditor will rank last in terms of repayment.
VAT: VAT, or value added tax, is a duty that is placed on goods and services provided by UK registered businesses, as well as some goods and services imported from the EU. The standard rate of VAT in the UK is 20%.
Voluntary Arrangements: A voluntary arrangement is entered into between an individual/company and their creditors.
Voluntary Liquidation: There are two types of liquidation – creditors voluntary liquidation and members voluntary liquidation.
Winding Up Order: An order made by the court – after the petition from a creditor – to place a company into compulsory liquidation.
Winding Up Petition: A winding up petition is often issued off the back of a statutory demand. It is often the debt collection tool of last resort as even if a winding up order is made, the petitioner will be an unsecured creditor and unlikely to receive a significant return on their debt.
Wrongful Trading: A company continuing to trade when there is no hope of avoiding insolvency. A director may be held liable for wrongful trading if they knew there was no hope to meet liabilities.
Zombie Company: A zombie company is not growing and struggling to get by on a day to day basis, but is also not looking to enter formal insolvency proceedings.