Glossary of terms. Bond Quasi fidelity insurance needed by a person who acts as an insolvency practitioner.

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1 Glossary of terms Administration Order a) A Court order placing the company that is, or is likely to become, unable to pay its debts under the control of an administrator following an application by, inter alia, the company, its directors or a creditor. The purpose of the order is the rescue of a company as a going concern, achieving a better result for creditors than available on liquidation, or realising property to enable a distribution to one or more secured or preferential creditors, b) The administration of the insolvent estate of a deceased debtor. Administrative Receiver An insolvency practitioner appointed by the holder of a floating charge covering the whole, or substantially the whole, of a company s property. He can carry on the company s business and sell the business and the other assets comprised in the charge to repay the secured and preferential creditors. Administrative receivers can only be appointed in exceptional circumstances under charges created after 15 September Administrative Receivership The legal state of a company when a person is appointed as an administrative receiver of its property and undertaking. Administration The legal status of a company subject to an administration order or an Out of Court appointed administrator. Administrator An insolvency practitioner appointed either by the Court under an administration order or Out of Court by the board of directors or the holder of a qualifying floating charge. The administrator will need to produce proposals for approval by the creditors to achieve the specified purposes. Associates Associates of an individual include family members, relatives, partners and their relatives, employees, employers, trustees in certain trust relationships and companies which the individual controls. Associates of companies include other companies under common control (see also connected persons). Bankruptcy Restrictions Orders/Undertakings An order/undertaking whereby a bankrupt can be restricted from certain activities for a period of up to 15 years from the making of the bankruptcy order. Bond Quasi fidelity insurance needed by a person who acts as an insolvency practitioner. Break-Up Sale Dismantling of a business. Trading ceases and the assets are sold off piecemeal. Company Directors Disqualification Act 1986 Statute dealing with the disqualification of directors, including reporting requirements by insolvency practitioners. Company Voluntary Arrangement A procedure under the Insolvency Act whereby a plan of reorganisation or composition in satisfaction of the company s debts is put forward to creditors and shareholders. There is limited involvement by the Court so that the scheme, once approved, binds all creditors. A supervisor is appointed to oversee implementation of the scheme. Composition An agreement between a debtor and his creditors whereby the compounding creditors agree with the debtor and between themselves to accept from the debtor payment of less than the amounts due to them in full satisfaction of their claims. Compulsory Liquidation A compulsory liquidation of a company is 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 its debtor company. Connected Persons Directors or shadow directors of a company and their associates, and associates of a person. Court-Appointed Receiver A person, not necessarily a licensed insolvency practitioner, appointed to take charge of assets usually where they are subject to some legal dispute. Bankruptcy Bankruptcy is the process of dealing with the estate of an individual who has been made bankrupt.

2 Creditors Committee A creditors committee is formed to represent the interest of all creditors in supervising the activities of an administrator or trustee in bankruptcy, or receiving reports from an administrative receiver. It consists of between 3 and 5 creditor members. Creditors Voluntary Liquidation A liquidation that is commenced by resolution of the shareholders, but is under the effective control of creditors, who can choose the liquidator at a meeting convened pursuant to Section 98 of the Insolvency Act Debenture A document stating the terms of a loan, usually to a company. Debentures may be secured on part or all of a company s assets, or they may be unsecured. In the context of a floating charge, the lender is often referred to as the debenture holder. Debt Arrangement Scheme This can assist you stopping creditors enforcing legal action and giving you time to pay with looming court orders. If the proposals are deemed fair and reasonable the creditors cannot block the scheme becoming effective. All interest charges and fees are frozen from the date of approval and written off on completion. Declaration of Solvency Forming part of the members voluntary liquidation process, a statutory declaration confirming that the directors have made a full inquiry into the company s affairs and that, having done so, they believe that the company will be able to pay its debts in full within 12 months from the start of the winding up. The declaration will include both the assets and liabilities as at the latest practicable date before making the declaration and must be signed by a majority of the company s directors. Discharge from Bankruptcy A process which releases a debtor from the formal bankruptcy procedure and from most of the debts owed at the date the bankruptcy order was made. Disqualification of Directors A director found to have conducted the affairs of an insolvent company in an unfit manner may be disqualified, on application by the Department for Business Innovation and Skills (BIS) to the Court, from holding any management position in a company for between 2 and 15 years. To avoid the costs of Court action it is also possible for unfit directors to give an undertaking not to act as a director for a period agreed with the BIS. Breach of such an undertaking carries the same penalties as breach of a disqualification order. Distribution in Specie The distribution of an individual s or company s assets in a non-monetary form. Enterprise Act 2002 An Act which contains measures that reform competition law, strengthen consumer protection and modernise the Insolvency Act. The provisions on corporate insolvency and the abolition of Crown preference came into force on 15 September The individual insolvency provisions and those reforming The Insolvency Service s financial regime came into force on 1 April European Regulation on Insolvency Proceedings 2000 The Regulation came into force on 31 May 2002 in all member states of the European Union, except Denmark. The Regulation only applies where the centre of a debtor s main interests is situated within a member state (usually presumed to be the place of the registered office). Whilst the Regulation does not attempt to harmonise the insolvency laws of the member states it does make important changes governing the relationship between different insolvency procedures within the EU. Extortionate Credit Transaction A transaction by which credit is provided on terms that are exorbitant or grossly unfair compared with the risk accepted by the creditor. Such a transaction may be challenged by an administrator, liquidator or trustee in bankruptcy.

3 Fixed Charge A form of security granted over specific assets which generally do not change on a day to day basis in the ordinary course of business (e.g. freehold property, goodwill), 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. Floating Charge A form of security granted to a creditor over general assets of a company which may change from time to time in the normal course of business (e.g. stock). 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 its debt, usually by appointing an administrative receiver or administrator, and obtain the net proceeds of sale subject to the prior claims of the preferential creditors. Fraudulent Trading Where a company has carried 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. Going Concern Basis on which insolvency practitioners usually prefer to sell a business. Effectively it means the business continues, and a higher price is often obtained. Guarantee A legal commitment to repay a debt if the original borrower fails to do so. Directors may give guarantees to banks in return for the bank giving finance to their companies. Income Payments Order/Agreement Court order or out of Court agreement which provides for part of a bankrupt s income to be paid to the trustee. The duration of an IPO/IPA is up to 3 years from the date of the bankruptcy order. Inhibition Court order placing restrictions on the disposal of certain assets, such as property or securities, and giving priority of payment over other creditors. Insolvent Defined alternatively as having total assets worth less than total liabilities, or being unable to pay debts as and when they fall due. If a creditor can establish either test, he will be able to present a winding up or bankruptcy petition. Insolvency Act 1986 Primary legislation governing insolvency law and practice. Extensively amended by the Enterprise Act 2002, many other statutes and statutory instruments are also relevant. Insolvent Liquidation A company goes into insolvent liquidation if it enters liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the liquidation. Insolvency Practitioner Person licensed by one of the chartered accountancy bodies, the Law Societies, the Insolvency Practitioners Association or the Department of Trade and Industry. The only person who may act as an office holder in an insolvency proceeding. Insolvency Rules 1986 The Insolvency Rules 1986, as amended, provide the detailed working procedures for the provisions of the Insolvency Act Lien Right to retain possession of assets or documents in settlement of a debt. Liquidation 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. Liquidation Committee Committee of creditors and sometimes shareholders who receive information from a liquidator and sanction some of his actions. It consists of between 3 and 5 creditor members. Liquidator Insolvency practitioner appointed to wind up a company or partnership.

4 Members Voluntary Liquidation Solvent liquidation where the shareholders appoint the liquidator to realise assets and settle all the company s debts in full, together with statutory interest, within 12 months. Misfeasance Breach of duty or misapplication of funds or property of a company by its directors or managers. Moratorium Implemented during the period leading up to a CVA (or partnership voluntary arrangement) precluding insolvency and other legal proceedings being started or continued against the company whilst it remains in force. The term is also used to describe the protection afforded to a company in administration from, inter alia, enforcement creditors. Mortgage A transfer of an interest in land or other property by way of security redeemable upon performing the condition of paying a given sum of money. Nominee An insolvency practitioner appointed to consider proposals of a company. Office Holder A liquidator, provisional liquidator, administrative receiver, administrator, supervisor of a voluntary arrangement, or trustee in bankruptcy. Onerous Property The term onerous property in the context of a liquidation or bankruptcy applies to unprofitable contracts and to property that is unsaleable or not easily saleable or that might give rise to a continuing liability. Such property can be disclaimed by a liquidator or a trustee in bankruptcy, e.g. a lease. Petition A written application to the Court for relief or remedy. Preferential Creditor Defined in Schedule 6 of The Insolvency Act Has priority over creditors whose debts are secured by a floating charge and unsecured creditors, when funds are distributed by a liquidator, administrative receiver or trustee in bankruptcy. The main categories are arrears of wages (up to a maximum of 800), all outstanding holiday pay, and arrears of contributions to an occupational pension scheme subject to certain restrictions. PAYE, national insurance continuations and VAT are no longer preferential. Proof of Debt Document submitted by a creditor to the insolvency practitioner giving evidence of the amount of the debt. Protected Trust Deed This is a formal proposal administered through a Licensed Insolvency Practitioner in Scotland to legally write off the debts you are unable to pay to your creditors. You would normally have unsecured debts in excess of 8,000 and qualify where your income cannot meet your debt repayments after allowing for normal day to day living expenditure. You only pay back what you can afford after living expenses, normally for a three year term. The remaining debt is then written off. Provisional Liquidator Insolvency practitioner appointed to safeguard a company s assets after presentation of a winding up petition but before a winding up order is made. Proxy Document whereby a person or company authorises another to represent them at a meeting. The proxy may be a general proxy, giving the holder discretion as to how he votes, or a special proxy requiring him to vote as directed. Proxyholder Person who attends a meeting on behalf of another. Preference A payment or other transaction in the 6 month period (or 2 years for connected parties) preceding a liquidation, administration or bankruptcy, which places a creditor or guarantor, in a better position than they would have been otherwise. The office holder may recover sums which are found to be preferences.

5 Qualifying Floating Charge A charge is a qualifying floating charge if it is created by an instrument which: states that paragraph 14 of Schedule B1 to IA 1986 applies to the floating charge; purports to empower the holder of the floating charge to appoint an administrator of the company; purports to empower the holder of the floating charge to make an appointment which would be the appointment of an administrative receiver within the meaning given by section 29(2) IA 1986; or purports to empower the holder of a floating charge in Scotland to appoint a receiver who on appointment would be an administrative receiver; and which, either on its own or with other security, relates to the whole or substantially the whole of the company s property. Receiver Often used to describe an administrative receiver, who may be appointed over a company s assets. More accurately, a receiver is the person appointed by a secured creditor holding a charge over certain assets of a company in order to take control of those assets for the benefit of the secured creditor. Receivership The general term applied when a person is appointed as a receiver or administrative receiver. Recognised Professional Body An organisation approved by the Secretary of State as being able to authorise its members to act as insolvency practitioners (see Insolvency Practitioner). Relevant Date The commencement date of the insolvency proceedings. Reserved Fund (also known as the Prescribed Part) Under the Enterprise Act 2002 the order of payment to classes of creditors was altered in cases where a floating charge was created after 15 September A sum of money, instead of being paid to e.g. a bank under its floating charge, is ring fenced for contribution towards the claims of the unsecured creditors. The prescribed part is calculated as follows: 50% of the first 10,000 of the sum, plus 20% of the remaining balance, up to a maximum of 600,000. Retention of Title 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. Scheme of Arrangement A compromise or arrangement between a company and its creditors or members or any class of them under section 425 of the Companies Act Secured Creditor A creditor with specific rights over some or all of the debtor s assets in the event of insolvency or other default. In essence, the secured creditor gets paid first. 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 most common example is a mortgage over a property. Sequestration This occurs where a creditor successfully raises a court action against you to obtain money that you owe and have made little or no repayment. You will be appointed a licensed Insolvency Practitioner who administrates on behalf of your creditors to recover any assets to repay all or part of the debt. Shadow Director 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. However, a person is not a shadow director merely because the directors act on advice given by him. Special Manager A special manager is a person appointed by the Court in a compulsory liquidation or bankruptcy to assist the liquidator or trustee in managing the insolvent s business. He does not need to be an insolvency practitioner. Statement of Affairs A statement of assets (usually including details of both book and estimated to realise values) and liabilities at a given date, usually prepared by the directors in corporate insolvency proceedings or the individual in personal insolvency proceedings.

6 Statutory Demand A formal notice requiring payment of a debt exceeding 750 within 21 days, in default of which bankruptcy or liquidation proceedings may be commenced without further notice. Supervisor Insolvency practitioner appointed by creditors to supervise the way in which an approved voluntary arrangement is put into effect. Transaction at an Undervalue/Gratuitous Alienation A transaction at an undervalue can be described either as a gift or a transaction in which the consideration received is significantly less than that given. In certain circumstances such a transaction in the 2 years prior to insolvency can be challenged by an administrator or liquidator. A trustee in bankruptcy can challenge such transactions occurring in the 5 years before insolvency. Winding-up Order Order made by the Court for a company to be placed in compulsory liquidation. Winding-up Petition A winding-up petition is a petition presented to the Court seeking an order that a company be put into compulsory liquidation. Wrongful Trading Applied to companies in liquidation where a director allowed the company to continue trading in circumstances where he 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 if they have not taken all steps necessary to minimise the loss to creditors. Trustee Quite apart from its common usage, (under the Trustee Act 1925), this is a term used for a variety of insolvency appointments, including the 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. Unsecured Creditor Strictly, any creditor who does not hold security. More commonly used to refer to any ordinary creditor who has no preferential rights, although, in fact, preferential creditors are also technically unsecured. VAT Bad Debt Relief The relief obtained from H M Revenue & Customs in respect of the VAT element of an unpaid debt. It can be claimed on debts over 6 months old that have been written off in the creditor s books. Voluntary Liquidation See creditors voluntary liquidation and members voluntary liquidation. Winding up See liquidation.