Insolvency & Debt Recovery Glossary of Terms

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1 Insolvency & Debt Recovery Glossary of Terms Administration An insolvency procedure in which an Administrator is appointed to attempt to rescue an insolvent company. It s designed to protect the company from creditors while a restructuring plan is agreed. Attachment of earnings If the debtor is an individual in permanent employment, the court can make an Order directed at the debtor s employer, requiring them to make periodic deductions from the debtor s earnings to pay into Court, so a proportion of their earnings can be made available to creditors. Bankruptcy An individual enters into Bankruptcy when they cannot pay their debts as and when they fall due. Bankruptcy can only apply to individuals (including sole traders and individual members of partnership). Bankruptcy petitions may be presented to the court by the individual, by creditors who are owed 750 or more, or by the supervisor of an individual voluntary arrangement (if the individual has not complied with the terms the arrangement). The bankruptcy period is 12 months although this period may be extended if a bankruptcy restriction order is made by the court. Charging order If the debtor owns land or buildings it is possible to impose a charge on the debtor s property to secure payment of the sum that is due. The charging order is registered at HM Land Registry and serves to ensure the debt is eventually repaid when the property is sold (providing there is sufficient equity after any prior charges have been paid), or if/when the debtor attempts to remortgage the property or obtain a secured loan on the property. Company Voluntary Arrangement( CVA ) A CVA is an agreement between the company and its creditors (unsecured, trade and tax) to repay them from future profits (or a deal may be written to sell assets and pay back creditors from the proceeds). The deal is based on preserving the company, rebuilding sales and profits and paying something back over a period of time to be agreed. Enforcement A creditor who has threatened court proceedings, commenced court proceedings and obtained an award against a debtor in those court proceedings, may still find that the debtor is reluctant to pay the sum of money that the debtor has been ordered to pay the creditor. Judgements made by the courts are not enforced automatically, however there are a number of processes which are designed to help unpaid creditors enforce awards, (see our Debt Recovery FAQ download for more information). Individual Voluntary Arrangement ( IVA ) An IVA is a formal agreement between a debtor and his or her creditors. An IVA proposal sets out how the debtor is going to repay the creditors, usually over a period of five years.

2 Administrative Receivership The process under which an insolvency practitioner is appointed by a debenture holder to realise company assets. This process has become less common since September 2003 when the Enterprise Act 2002 came into force. Annulment Bankruptcy annulment means to cancel the bankruptcy and can only be achieved by an order of the court. The effect of the annulment is as though the bankruptcy order was never made and the bankrupt will revert to his or her pre bankruptcy status. Bankruptcy Restriction Orders ( BRO ) A bankrupt who has been dishonest or in some other way to blame for their bankruptcy, may undertake or have a court order made against them which will mean that the restrictions within the bankruptcy continue to apply for a period of between 2 to 15 years. County Court Judgement ( CCJ ) An order made by the county court in respect of the debt they are owed. Compulsory Liquidation This occurs where a petition is made to the court to wind up the company. Such petitions are normally presented by creditors but can also be presented by directors or the company itself if there are insufficient assets to pay its creditors. Creditors Voluntary Liquidation ( CVL ) A process by which the directors of a company convene a meeting of shareholders and creditors to place the company into insolvent liquidation. This is done with the assistance of a licensed insolvency practitioner instructed by the directors. Debenture A type of security often referred to as a fixed and floating charge over a company s assets. Depending on when the debenture was dated it can give the debenture holder the right to appoint an administrative receiver or an administrator to realise the assets of a company. Dividend A sum distributed to the creditors of the company. Debt Management Plan A repayment scheme to pay off part or all of your debts. This is not a formal insolvency procedure and will not bind creditors from taking enforcement action but often helps to relieve immediate creditor pressure. Director Disqualification A procedure whereby a director has a court order made against them or gives an undertaking to the Secretary of State, which makes it an offence for that person to be involved in the management or directorship of a company for the period specified in the order (up to 15 years).

3 Distraint This is where goods are seized and ultimately sold towards payment of debt. Distraint is generally available to HMRC and the landlord of the business premises in respect of unpaid rent. Insolvency Practitioner Under the Insolvency Act 1986, only persons who are licensed insolvency practitioners can act as liquidators, supervisors of voluntary arrangements, administrators, administrative receivers and trustees in bankruptcy. It is a criminal offence for anyone who is not a licensed insolvency practitioner to act as one. Furthermore, any purported appointment by someone who is not licensed could be void. Insolvency Insolvency is a general term used to indicate that a person or business / organisation is unable to pay their debts as they fall due. Late Payment Interest The Late Payment of Commercial Debts (Interest) Act 1998 ( the Act ) was introduced on 1 November 1998 to give businesses a statutory right to claim interest from slow payers. The Act applies to contracts for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business. Certain types of contract, for example, mortgages are excluded from the application of the Act. Letter Before Action When you instruct a debt recovery specialist to collect a debt, the debt recovery specialist will write to your debtor and tell the debtor that unless the debt is paid within a stated number of days, Court proceedings will be commenced. The letter will identify the creditor and the debtor and explain how much the debtor owes, usually by identifying invoices or a contract. Official Receiver A civil servant working for the Department of Trade and Industry who deals with the affairs of a company in liquidation or an individual who has been made bankrupt. Partnership Voluntary Agreement ( PVA ) A PVA is an agreement made between a partnership and its creditors to repay a percentage of the total debt of the partnership; it operates in much the same way as a CVA or an IVA. Personal Guarantee A guarantee of payment given by someone, more often than not a director of a company, in respect of company liabilities. Preferential Creditor A creditor who is entitled to receive certain payments in priority to floating charge holders and other unsecured creditors. These creditors include occupational pension schemes and certain monies due to employees.

4 Proof of Debt A form to be completed by creditors, in all insolvency procedures, which details the name of its claim / debt against the insolvent entity. Provisional Liquidator This will either be the Official Receiver or a Licensed Insolvency Practitioner appointed by the court to safeguard the company s assets prior to the making of a winding up order. It is usually only appropriate for a provisional liquidator to be appointed if there is an issue that the assets of the company will be dissipated. Proxy Form If a creditor cannot attend the meeting of creditors themselves and wishes to appoint someone to represent them, they must fill in this form and return it to the convener of the meeting. Retention of Title ( ROT ) A seller s conditions of sale will normally include an ROT clause (provided that the seller s product is capable of being recovered). A good ROT clause will provide that the goods supplied remain the seller s property until paid for, or words to that effect. A seller may either retain title to specific goods listed in a particular invoice until those specific goods are paid for or to all goods until such time as the goods supplied have been paid for. The general rule, set out in Section 17 of the Sale of Goods Act 1979, is that ownership of goods passes from a seller to a buyer when the seller and the buyer intend it to pass. As ROT clauses prevent title in goods passing from a seller to a buyer until those goods have been paid for, the seller becomes able to recover those goods (or the invoiced value of those goods) from the buyer if the buyer becomes insolvent. Secured Creditor A creditor who holds security over the assets of the company, normally in the form of a charge or debenture. Secured creditors do not normally vote at meetings of creditors, choosing instead to rely on their security. Shadow Director A person, although not formally registered as a director at Companies House, on whose instructions the directors/employees of a company are accustomed to acting. Statement of Affairs A specialised form of financial statement setting out the debtor s assets and liabilities secured, preferred and unsecured. This document is usually prepared on short notice and from incomplete records. It is sworn to by an officer of the company and or by the bankrupt where applicable. Statutory Demand This is a formal demand for payment of an undisputed amount over 750. The demand has to be personally served on an individual or any entity other than a limited company. The debt should be paid within 18 days of the demand being served to avoid further action. Failure to pay the debt following the issue of a Statutory Demand can lead to a compulsory liquidation or a bankruptcy petition being issued against the debtor.

5 Third party debt order If the debtor is owed money then a court order can be obtained which requires the company or person that owes money to the debtor to pay that money directly to you. Your debtor s own debtors will not only include trade debtors, but will also include persons who are holding money for your debtor, such as a building society or bank. It can therefore be very useful to obtain and record your customer s bank details at every opportunity you never know when you may need them. Trustee in Bankruptcy The licensed insolvency practitioner appointed by either the Official Receiver, or the creditors, to deal with the affairs of the bankrupt. Warrant of execution If you are able to determine that your debtor has assets, then an individual known as Bailiff or a High Court Enforcement Officer (formerly known as a Sheriff) can be instructed to seize the debtor s assets and to sell those assets at auction. The proceeds of this sale (after deduction of expenses) are passed to the creditor so that the debt can be paid. However it should be noted that certain assets are protected, and cannot be removed for sale. Bailiffs work in the County Court, and this process is known in the County Court as a Warrant of Execution. The equivalent process in the High Court is known as a Writ of Fieri Facias and is carried out by High Court Enforcement Officers. Antecedent Transactions The word "antecedent" is defined as "going before". In a very basic form, the provisions of the legislation relating to antecedent transactions allow the Official Receiver to restore the position to what it would have been but for the transaction, if it was inappropriate, unfair or wrong for the said transaction to take place i.e. if something has been done in the run-up to insolvency which results in one creditor being treated more favourably than the others, or where a person other than a creditor benefits from the actions of the debtor and the creditors suffer as a result. De Facto Director A person who is not a Statutory Director but performs the aces and duties of a director or is judged to be director in law and on whose instructions and directions other directors and / or employees become accustomed to act.