Administration

A formal insolvency process that prevents creditors of the company taking enforcement action to recover a debt due from the company, whilst the Administrator is in office. The protection of administration provides the company with time to put forward a plan of re-organisation with a view to preserving the business, or, alternatively, provides for a more advantageous realisation of the assets of the business if it is established that the business has no future. (See our notes on this procedure)

Administrative Receiver

A person appointed by the holder of a floating charge debenture over a companies assets and whose primary objective is to realise and collect the assets of the company in order to repay the debenture holder.

Antecedent Transactions

The general term used to describe transactions which an Insolvency Practitioner may review during the course of his administration of the estate, such as preferences, wrongful trading, an illegall dividend to shareholders or misfeasance.

Bankruptcy

A person is made bankrupt by Order of the Court. From the date of the Bankruptcy Order the majority of the assets of the person who has been made bankrupt will vest in the Official Receiver or a Trustee in Bankruptcy. Certain restrictions are placed upon the bankrupt during the period that they are an undischarged bankrupt.

Bankruptcy Restriction Order or Undertaking

A procedure introduced with effect from 1 April 2004 whereby a bankrupt who has been dishonest or in some other way is considered to be to blame for their bankruptcy, may have a court order made against them or give an undertaking which will mean that the bankruptcy restrictions placed upon them will continue to apply after their discharge from bankruptcy for a period between two and fifteen years.

Company Voluntary Arrangement (CVA)

A formal agreement between the company and it's creditors and shareholders, which will enable the company to settle the creditors claims, either in full or in part, over a period specified in the agreement. This usually enables the company to continue trading. (See our notes on this procedure)

Compulsory Liquidation

The company is put into liquidation as a result of an order of the court. Normally the order of the court is made upon the application of a creditor of the company.

Conditional Fee Agreements

Agreements entered into with solicitors where there are perhaps insufficient funds available on the estate to employ a solicitor. Under the agreement, the solicitor only gets a fee if we are successful in recovering funds for the insolvency estate. Such agreements often provide for the solicitor to be paid a percentage uplift on their normal fee to reflect the risk that they are taking.

Cost Savings in Bankruptcies

Where a person is made bankrupt, all asset realisations have to be paid into the Insolvency Service Account which is operated by the Department of Trade & Industry. A fee equivalent to 17% of realisations paid into the account charged by the Department of Trade & Industry. Where there are likely to be substantial realisations, an IVA or PVA may result in significant cost is savings.

Creditors Voluntary Liquidation (CVL)

An insolvent company, where the shareholders of the company pass resolutions to place the company into liquidation or, alternatively, an Administrator dealing with the affairs of the company files the required papers with the Registrar of Companies, placing the company into liquidation.

Disqualification Unit

An agency of the Department of Trade & Industry that considers reports submitted by the Official Receiver and Insolvency Practitioners on directors of insolvent companies. Where the Disqualification Unit is of the view that the conduct of the director makes them unfit to be a director of a company, an application can be made to the court for an order for disqualification of between two and fifteen years.

Doctrine of Equitable Exoneration

In a bankruptcy case where the bankrupt has obtained further borrowings which it can be demonstrated have been utilised wholly for the business and which have been secured upon the domestic property, it is possible to argue that these additional borrowings should come out of the bankrupt's share of the equity in the property, thus increasing the equity attributable to other third parties who might have an interest in the property.

Going Concern

Realisations may be higher where it is possible to sell a trading business, rather than ceasing to trade immediately and selling the assets on a 'break up' basis.

Illegal Dividends to Shareholders

Under company legislation, a company must have sufficient distributable reserves in its profit and loss account in order to pay a dividend to its shareholders. Where it can be demonstrated there were insufficient reserves at the time of the dividend payment, an order can be sought that the dividend was illegal and should be repaid by the shareholders. If the shareholders fail to repay the sums in full, the directors of the company may have to make up any shortfall

Interim Order

An order made by a court which has effect during the period that an individual has drafted a proposal for an Individual Voluntary Arrangement and prevents creditors taking enforcement action to recover their debt

Licensed Insolvency Practitioner

In order to undertake any insolvency appointment, an individual has to be authorised by either the Department of Trade & Industry or a recognised professional body.

Liquidation

A formal legal process where the assets of a company or a firm are realised and used to settle its liabilities.

Liquidator

A Licensed Insolvency Practitioner appointed to deal with the assets and liabilities of the company in either a CVL, MVL or Compulsory Liquidation.

London Gazette

A specialist publication of Her Majesty's Stationery Office in which public notices and legal notices are advertised.

Members Voluntary Liquidation (MVL)

Where the life of a company is to be brought to an end, and that company is solvent, a 'Members Voluntary Liquidation' is the most often used approach.

Misfeasance

Section 212 of the Insolvency Act 1986 provides a remedy against directors and others who can be shown to have been delinquent or acted in breach of their fiduciary duties.

Moratorium

Provides an eligible company with protection from creditors taking enforcement action whilst CVA proposals are considered.

Nominee

A licensed Insolvency Practitioner who undertakes the preparatory work for a Voluntary Arrangement, before its implementation.

Official Receiver

An Officer of the Court and Civil Servant employed by the Department of Trade & Industry who heads up the regional offices of the Insolvency Service (a government agency) who have responsibility for dealing with bankruptcies and compulsory liquidations.

Preference

A legal remedy available to a Liquidator in a liquidation and Trustee in Bankruptcy in a bankruptcy case to review payments made to third parties in the period leading up to the insolvency. It is necessary to demonstrate that the third party has been put into a better position than they would otherwise have been in had that transaction not have occurred. Upon proving the matter to the court, the court can make an order that the third party make a repayment of any sum that they have been deemed to have received in preference.

Preferential Creditors

Certain creditors, as defined in schedule 6 of the Insolvency Act 1986, are entitled to receive payment out of the assets of the company prior to the ordinary unsecured creditors. For insolvency cases commenced prior to the 15 September 2003 the preferential creditors included certain debts due to the Inland Revenue, Customs & Excise and in respect of Social Security contributions, known as 'Crown debts'. The Enterprise Act 2002 abolished the preferential status of 'Crown debts', leaving remuneration and holiday pay of employees and contributions to occupational pension schemes as the main preferential liabilities in insolvency cases.

Section 110 Insolvency Act 1986 Reconstruction

Provisions within the Insolvency Act 1986 which, together with tax legislation, enables companies to be split into various component parts, with those parts of the business being transferred to new companies as part of a reorganisation of the business. The nature of such schemes vary, but in the majority of cases shares in the new companies will be exchanged for shares in the old companies and such schemes are often used in family run companies where different members of the family want to take the business in different directions.

Section 652A Companies Act 1985 Striking Off

A procedure available to enable a company to be struck off the register where there is no longer any use for the company and all of the assets and liabilities of the company have been dealt with. It is necessary for the company to have ceased trading for at least three months prior to being able to make an application under these provisions.

Secured Creditor

A creditor who holds security, such as a mortgage over a persons or companies assets for money owed.

Seizure by Creditors

When a creditor is owed money by an individual or company, they may take legal action to recover the debt which may involve taking assets of the individual or company in settlement of the debt.

In most instances, it will first be necessary for the creditor to obtain judgement and if the judgement debt is not settled, the creditor can ask for a bailiff to seize assets to settle the debt. However, certain Government departments have special rights which enable them to seize goods in satisfaction of a debt without first obtaining judgement. In addition, where the individual or company trade from rented premises, the landlord will probably have a right to seize goods in satisfaction of outstanding rent, without first obtaining judgement.

Small company

For the purposes of considering whether a company is eligible to obtain a moratorium, providing protection from creditors taking enforcement action, whilst a CVA proposal is considered, the company must be able to satisfy two of the following three criteria:

Annual turnover not more than £5.6m.

Balance sheet total not more than £2.8m.

Number of employees not more than 50

Statement of Affairs

A document completed by either a bankrupt or company director detailing the assets and liabilities of the individual or company.

Supervisor

A Licensed Insolvency Practitioner that is appointed by the creditors in respect of either a Company Voluntary Arrangement or Individual Voluntary Arrangement.

Transaction at an Under Value

There are provisions in the Insolvency Act 1986 for a Liquidator in a liquidation and Trustee in Bankruptcy in a bankruptcy case to review transactions prior to the date of the insolvency in order to establish whether assets have been transferred to a third party at a value which is less than their market value. Where such cases can be proved, the court may order that the situation be restored to the position immediately prior to the transaction taking place.

Trustee in Bankruptcy

The trustee in bankruptcy is either the official receiver or an insolvency practitioner appointed to take control of the assets of the bankrupt, realise them and after deducting the costs of dealing with the bankruptcy, distribute the proceeds to the creditors of the bankrupt.

Transactions Defrauding Creditors

A transaction entered into at an under value which it can be shown was undertaken to put that asset beyond the reach of an individuals creditors. A court can make an order restoring the position to what it would have been if the transaction had not been entered into (section 423 of the Insolvency Act 1986). A right of action under these provisions is not restricted to the Insolvency Practitioner who may be dealing with the affairs of the individual, but it is open to use by anyone who can demonstrate that they have been disadvantaged as a result of any such transaction.

Wrongful Trading

A legal remedy that can only be used by the liquidator of a company in an insolvent liquidation. It arises where it can be established that sometime before the commencement of the liquidation of the company, the directors knew or ought to have concluded that there was no reasonable prospect of the company avoiding going into an insolvent liquidation and notwithstanding this, they allowed the company to continue trading. If the case is proven, the court can order that the directors make a payment to the Liquidator. This payment will generally be the amount by which the deficiency has increased between the date that it is established that the company ought to have ceased trading and the date it actually did cease trading.