Most people could make an educated guess at what the word ’insolvent’ means. But there is a myriad of terminology surrounding the subject of insolvency that is not as familiar. For example, you may have heard of football clubs going in to administration, but do you know what this actually means? Would you know the difference between a liquidator and a receiver? Or how a CVA differs to an IVA?

This article, which is the second in our series of ‘jargon-busters‘, looks at the meaning of various terms relating to insolvency.

Insolvency Terminology

Administration – this is a formal insolvency procedure for companies or limited liability partnerships (LLPs) when in financial difficulty. A company can place itself in to administration or it can be placed into administration by creditors of the company. It provides the struggling company with the potential for rescue. Administration normally stops any legal action or other process against the company from proceeding. This means creditors can’t take legal action against the company to recover outstanding amounts whilst the administration is ongoing.

Administrator – a professional insolvency practitioner (IP) who will take control of the struggling company when it goes in to administration. The administrator’s job is to asses the company’s viability to survive and either:

i) save the company so that it can continue as a ‘going concern’, i.e. able to meet its financial obligations moving forward. Or, if this is not possible, the administrator will;

ii) aim to put the company’s creditors in a better position than if the company was liquidated (without first being in administration). This may involve selling off the company’s property to pay off its debts.

Assets – items of property, stock or currency regarded as having value and available to meet debts and other commitments. For example, cash is an asset.

Bankruptcy – this is a formal insolvency procedure for individuals who can’t pay their debts. It does not apply to companies or partnerships. Bankruptcy usually lasts a year so isn’t permanent. During the bankruptcy an official receiver will take control of the person’s assets, such as their property and non-essential income, and use them to repay the individual’s creditors. Bankruptcy can help individuals clear their debts and start again as, at the end of the bankruptcy, mosts debts are cancelled.

Creditor – a person, company or other organisation which is owed money or has a financial claim against another.

Company Voluntary Arrangement (CVA) – a formal procedure that is a legally binding agreement between a company and its creditors. A CVA allows an insolvent company to come to an arrangement with its creditors to pay off a percentage of its debt over a period of time. By reducing cash flow problems, the intention is that the company can concentrate of improving the business and remain a ‘going concern’.

Debtor – a person, company or other organisation which owes money.

Director -an appointed individual who is legally responsible for running a company. A director must be 16 years old or older and not be disqualified from being a director.

Insolvency – when a person or business cannot pay its debt as they fall due or where its liabilities exceed its assets.

Individual Voluntary Arrangement (IVA) – a formal procedure that is a legally binding agreement between an individual and its creditors. An IVA allows an insolvent individual to come to an arrangement with their creditors to pay off a percentage of their personal debt over a period of time. It is a formal debt solution approved by the court.

Insolvency Practitioner (IP) – an individual who is licensed and authorised to act in relation to an insolvent individual, partnership or company. An IP’s primary role is to attempt to rescue the business but with an overriding duty to act in the best interests of the creditors.

Insolvent – when an entity is unable to pay the debts it owes to third parties. This could mean being unable to pay debts as they become due, or if it has more liabilities than assets.

Liabilities – what is owed to other parties, such as bank loans, mortgage repayments and unpaid bills.

Liquidation – the legal process in which a liquidator is appointed to bring a company to an end. When a company is liquidated, its assets are used to pay off its debts. This does not mean that the company’s creditors will definitely get paid. Any money left goes to shareholders. At the end of the process, the company will cease to exist. A liquidation can be voluntary or compulsory.

Liquidator – a professional insolvency practitioner who is appointed to run the liquidation process. The liquidator will take control of the company and ensure that all the company’s affairs have been dealt with properly before the company ceases to exist. This may include settling any outstanding legal disputes and selling off the company’s assets to pay creditors.

Receiver – a named individual appointed in a receivership to collect a specific creditor’s debts only. The receiver may take possession of property in order to liquidate it and recoup the debt.

Receivership (formerly known as administrative receivership) – a legal process in which a creditor, usually a bank or other financial institution, appoints a receiver over one or more of an insolvent company’s assets or properties to liquidate them and recover their debt. Such asset / property must be specified in a legal charge within a secured loan agreement. Receivership is less widely used than administration, in part due to the the Enterprise Act 2002.

Winding-up Petition – a legal notice put forward to court by a creditor requesting the court liquidate the debtor company. In order to petition the court in this way a creditor must be owed £750 or more.

Plain English

At Bailoran we pride ourself on using plain English. This is because, if you don’t understand the documents or language, you won’t be able to exercise your rights or take responsibility for your obligations. If you need help understanding any legal terminology, our team of experts is ready to help.

This article does not contain legal advice. Should you require legal advice, please do not hesitate to contact our offices on 0113 266 0735 or at info@bailoransolicitors.com. Get in touch to speak to one of our legal experts.