Resources - Glossary of Terms - Cranfield Business Recovery

Glossary of Terms

Administration

An administration order is usually sought through a petition by a company that is insolvent, or is likely to become so. This procedure places the company under the control of a licensed insolvency practitioner and the protection of the court to achieve one (or more) specified statutory purposes. The aim is to save the business or achieve a better result for creditors than in liquidation. Any creditor with a floating charge must also be given the opportunity to decide whether to appoint an administrative receiver or their own administrator before the order is made. If the petition is successful, the company will be placed under the day-to-day control and management of an administrator. The administrator proposes ways to fulfill the order and presents these suggestions at a creditors’ meeting. Once under an order, the company is protected from creditors.

Administrative Receiver

A licensed insolvency practitioner appointed by the holder of a floating charge, created before 15th September 2003, covering the whole, or substantially the whole, of a company’s property. An administrative receiver can carry on the company’s business and sell the business and other assets subject to the floating charge to repay the secured creditors and preferential creditors.

Administrative Receivership

An administrative receiver is appointed by a bank or other lending institution, which holds the majority of a company’s assets as security against lending under a floating charge debenture.

The administrative receiver can continue to operate the business, and often does, whilst trying to sell it as a going concern. A higher price is usually gained than if the company’s assets were disposed of piecemeal. The purchaser acquires the business free of debt and the money received is distributed to creditors in the order of their security and statutory order of priority.

An administrative receiver has no authority to deal with the claims of unsecured creditors. If sufficient funds become available for distribution to the general body of creditors they are dealt with by a liquidator appointed separately. Under the recent reform of insolvency law, administrative receiverships are not possible in respect of debentures dated on or after 15th September 2003. Administrative Receivers can still be appointed in respect of loan documentation dated before 15th September 2003, where the loan documentation enables such an appointment in the event of a default.

Administrator

An administrator is a licensed insolvency practitioner appointed in respect of an administration to achieve the statutory purpose. The administrator will need to produce a plan for approval by the creditors to achieve this.

Bankrupt

A bankrupt is an individual against whom a bankruptcy order has been made by the court. The order shows that the bankrupt is unable to pay his/her debts and deprives him/her of property, which is then realised for distribution amongst the creditors of the bankrupt.

Bankruptcy

In bankruptcy, the court is officially responsible for making a bankruptcy order against an individual. This is on the petition of a creditor on the grounds of insolvency, the individual themselves, by the supervisor of a failed individual voluntary arrangement or by the Secretary of State.

Once an order is granted it must be advertised in The London Gazette. The assets of the bankrupt fall under the control of a trustee – either the Official Receiver or a licensed insolvency practitioner. The trustee is responsible for realising the bankrupt’s assets and distributing the proceeds to creditors in order of priority.

Any capital held in the form of property, including a house, must be realised. The law does, however, allow a period of 12 months for the bankrupt’s family to make alternative arrangements, before it will order the property to be sold. The bankrupt is usually allowed to keep furniture and other basic domestic requirements and in certain circumstances a car. An un-discharged bankrupt is subject to certain disabilities, which can make life difficult.

Bankruptcy Order

An order of the court, following the petition of a creditor or the debtor him/herself or a supervisor of a failed individual voluntary arrangement on the grounds of insolvency or by the Secretary of State.

Company Voluntary Arrangement (CVA)

Company voluntary arrangements involve the planning of corporate reorganisation, sometimes involving delayed or reduced payments of debt, capital restructuring or an orderly disposal of assets. The CVA is proposed to creditors and shareholders at creditors’ and shareholders’ meetings. There is limited court involvement and the scheme is supervised by a licensed insolvency practitioner.

Compulsory Liquidation

A compulsory liquidation (also called a compulsory winding-up) is a liquidation ordered by the court. This is usually on the petition of a creditor, company, director(s) or shareholder(s). A winding-up petition may also be presented by the Secretary of State for Trade and Industry on the grounds of public interest.

The court initially refers the case to the official receiver, who is a civil servant and an officer of the court. If the assets are likely to cover the administrative costs, the Official Receiver calls a creditors’ meeting to appoint a liquidator other than him or herself, otherwise he or she will remain in office. In some cases the Department of Trade and Industry may use its power to appoint a liquidator as soon as the winding-up order is made. In any event, the Official Receiver retains responsibility for investigating the conduct of directors and other officers.

Creditors' Voluntary Liquidation (CVL)

A CVL is a liquidation begun by shareholder resolution, but is controlled by the creditors who can appoint a liquidator of their choice. The liquidator must be a Licensed Insolvency Practitioner.

Debenture

A document setting out the terms of a loan, usually to a company. A debenture may be secured on part or all of a company’s assets and often comprises of a fixed charge and a floating charge. The lender is referred to as the debenture holder and is a secured creditor.

Fixed Charge

A fixed charge is a form of security granted over specific assets, preventing a company or individual dealing with those assets without the consent of the secured creditor. It gives the secured creditor a first claim to the proceeds of sale of the assets over which the charge falls and the creditor can usually appoint a receiver to realise the assets in the event of default. A fixed charge holder will rank before preferential creditors and unsecured creditors.

Floating Charge

A floating charge is a form of security over general assets of a company which can change from time to time as part of the normal activity of a business. The company continues to use the assets until a default event occurs. If this happens, the secured creditor will usually appoint an administrative receiver to realise the assets to recover the debt. A floating charge holder will rank after preferential creditors but before unsecured creditors.

Going Concern

A basis on which a licensed insolvency practitioner will sell a business. Effectively it means the business continues, jobs are saved, and a higher price is obtained.

Individual Voluntary Arrangement (IVA)

An IVA is a less formal procedure open to insolvent individuals (even those who are already subject to bankruptcy proceedings). The procedure is extremely flexible and varies from case to case.

In an IVA, creditors should benefit more than under bankruptcy proceedings. The arrangement, if approved by the creditors at a meeting, is overseen by a supervising licensed insolvency practitioner. It is binding on those creditors who had notice of and were entitled to vote at the meeting.

An IVA cannot affect the rights of secured creditors or preferential creditors except with their agreement.

The IVA’s benefit is its flexibility and comparatively cheap administration costs for creditors, thereby increasing returns to creditors. IVAs also enable individuals to go about their daily business in a less restricted manner than under bankruptcy.

Licensed Insolvency Practitioner

A person licensed by one of the Chartered accountancy bodies, the Law Societies, the Insolvency Practitioners Association or the Department of Trade and Industry. This is the only person who may act as an office holder in insolvency proceedings.

Liquidator

A licensed insolvency practitioner appointed to wind-up a company.

Members' Voluntary Liquidation (MVL)

A MVL is the procedure for winding up a company which is solvent. It is so called because the liquidation remains under shareholder control. Reasons for winding up a solvent company include:

providing an exit route for private company shareholders to enable them to realise their investment

where a company is dormant or its purposes have been fulfilled as part of a reorganisation scheme.

The procedure requires a statutory declaration of solvency by the company directors. The liquidation commences with a shareholder resolution. Although the MVL procedure is only available for solvent companies, the law requires that the liquidator is a Licensed Insolvency Practitioner.

Nominee

A licensed insolvency practitioner appointed by a company or an individual to formally advise during the period leading up to the holding of the creditors meeting to approve the terms for a company voluntary arrangement or an individual voluntary arrangement.

Official Receiver

An officer of the court who is a civil servant and a member of the Department of Trade and Industry Insolvency Service. He or she deals with bankruptcies and compulsory liquidations.

Preferential Creditor

A class of creditor who benefits from a statutory priority over floating charge and unsecured creditors. Preferential creditors are predominantly employees of the company or of an individual. Prior to 15th September 2003, the Inland Revenue, HM Customs & Excise and the DSS enjoyed preferential status in respect of certain claims.

Cranfield Business Recovery, Coventry, West Midlands, UK