Here is a glossary of crucial phrases and acronyms to help you navigate the world of insolvency a little bit more easily.
Navigating the world of insolvency can be a daunting task, especially if you are unfamiliar with the terminology and acronyms commonly used in this field.
To make things easier, there is a glossary of crucial phrases and acronyms that can help you better understand the insolvency process. This glossary provides definitions and explanations of key terms such as bankruptcy, liquidation, creditor, debtor, and more.
It also includes important acronyms such as CVA (Company Voluntary Arrangement) and IVA (Individual Voluntary Arrangement) that you may encounter in insolvency proceedings.
By familiarising yourself with these terms and acronyms, you can navigate the insolvency process with greater ease and confidence.
Insolvency terminology for dummies
You may come across the following term and lingo within the insolvency sector:
Administration
Administration is a legal process that puts a company under the control of an IP and the court’s protection to achieve specific statutory goals. The primary aim of administration is to rescue the company, or if that’s not achievable, to secure better results for creditors than in a liquidation.
Failing that, the process aims to realise assets to pay secured or preferential creditors. By undergoing administration, the company can have a chance to restructure its operations and finances, with the guidance of a licensed professional. The ultimate goal is to help the company get back on track and pay off its debts, while minimising the loss for creditors.
Administration Order
An administration order is a legal tool available to companies that are struggling financially, or are at risk of becoming insolvent. The court can grant an administration order, which places the company under the control of an administrator with the objective of achieving the purpose of administration.
This can be requested by the company itself, its directors, its liquidator, or a creditor. The administrator then takes over the management of the company and works to restructure its finances and operations, with the aim of either rescuing the company or achieving a better outcome for its creditors than a liquidation would.
By undergoing administration, the company has a chance to turn things around and get back on its feet. The process is designed to protect the interests of creditors while allowing the company to continue operating and paying off its debts.
Administrative Receiver
When a company is unable to repay its debts, an administrative receiver may be appointed by the holder of a floating charge, which covers most or all of the company’s assets. The administrative receiver is an IP who is authorized to take over the management of the company and has the power to sell its assets to repay the secured and preferential creditors. The administrative receiver is also permitted to continue running the business while they work to repay the creditors.
This person is often referred to as a “receiver” and is responsible for managing the company’s financial affairs and ensuring that the interests of the creditors are protected. Through this process, the administrative receiver can help to recover as much money as possible for the creditors, while also working towards a solution that allows the company to continue operating.
Administrative Receivership
Receivership is a term that is commonly used to refer to the situation where a person is appointed as an administrative receiver. Essentially, receivership occurs when a company is unable to meet its financial obligations, and a receiver is brought in to manage its affairs. This receiver is typically an insolvency practitioner (IP) who has been appointed by the holder of a floating charge over the company’s assets.
Administrator
When a company is facing financial difficulties and is in danger of becoming insolvent, an insolvency practitioner (IP) can be appointed to manage its affairs. This person is known as an administrator, and their role is to work towards achieving the purpose of administration as set out in the Insolvency Act 1986.
To do this, the administrator must produce a plan, which is called the “administrators’ proposals.” These proposals must be presented to the creditors for approval, and they outline the steps that the administrator will take to help the company recover. The goal of administration is to either save the company or to achieve a better outcome for its creditors than if it were to go into liquidation. The administrator has a significant role to play in this process, and their proposals will be carefully scrutinized by the creditors before they are approved. Ultimately, the administrator’s job is to guide the company through the difficult period and help it get back on track financially.
Company Directors Disqualification Act (1986)
The Company Directors Disqualification Act of 1986 is a piece of legislation that deals with the disqualification of individuals from holding directorial or other influential positions within a company. This act outlines the circumstances under which a person can be disqualified from such a position, including instances of wrongful trading, fraudulent activities, or mismanagement of a company’s finances.
The act provides a mechanism for investigating and prosecuting individuals who are found to have engaged in these types of behaviors and for imposing penalties such as fines, imprisonment, or disqualification from holding any directorial position. Ultimately, the aim of the act is to promote responsible and ethical business practices and to ensure that individuals who are not fit to hold positions of power within a company are prevented from doing so.
Company Voluntary Arrangement (CVA)
A company voluntary arrangement (CVA) is a process that enables a company to propose a plan for reorganization or debt settlement to its creditors and shareholders. This allows the company to come to an agreement with its creditors and avoid insolvency proceedings.
Unlike other insolvency procedures, a CVA involves limited intervention by the court, and the scheme is overseen by a supervisor who is appointed by the company. The supervisor is responsible for making sure that the CVA is being carried out in accordance with the agreed terms and for managing the payments to creditors.
Composition
A composition is a legal agreement between a debtor and their creditors. In this agreement, the creditors agree to accept a reduced amount of money from the debtor in exchange for releasing the debtor from their outstanding debts. The creditors also agree amongst themselves to accept the same reduced amount, thereby avoiding any disputes that may arise from uneven treatment of debts.
A composition agreement is typically reached when a debtor is unable to pay their debts in full and seeks to negotiate a compromise with their creditors. The debtor may propose a specific amount to pay off their debts, which the creditors may accept or reject. If the creditors accept the proposal, the debtor will make payments according to the terms of the agreement until their debts are fully satisfied.
Compulsory Liquidation
A court-ordered liquidation of a company is known as a compulsory liquidation. It typically occurs when a creditor petitions the court for the liquidation of its debtor company, and it is the only way for a creditor to initiate the liquidation process.
Connected Persons
A company’s connected persons consist of its directors, shadow directors, and their associates, as well as associates of the company itself.
Court-appointed Receiver
A court-appointed receiver is a person, not necessarily an IP, appointed to take charge of assets usually where they are subject to some legal dispute. Not strictly an insolvency process, the procedure may be used other than for a limited company, e.g. to settle a partnership dispute.
Creditors” Committee
A committee of creditors refers to a group established to safeguard the rights of all creditors involved in bankruptcies, administrations, and administrative receiverships. The specific duties of the committee vary depending on the type of procedure being followed.
Creditors” Voluntary Liquidation (CVL)
A “creditors’ voluntary liquidation” is a process that typically involves an insolvent company. This process begins with the passing of a resolution by the shareholders, but ultimately the creditors have the most control and influence over the appointment of a liquidator.
Debenture
In general, a debenture is a written acknowledgement or contract that creates a debt. Typically, it refers to a legal document that establishes a fixed or floating charge over a company’s assets and operations.
Disqualification of Directors
A director who has managed the affairs of an insolvent company in an “unfit” way may be disqualified, upon application to the court by BIS, from holding any management role in a company for a period ranging from two to fifteen years.
Fixed Charge
A fixed charge is a form of security that allows a creditor to secure specific assets belonging to a debtor. Once the charge is registered, the debtor is prevented from dealing with those assets without the consent of the secured creditor. This means that the creditor has priority access to any proceeds of sale should a default occur.
Additionally, the creditor can usually appoint a receiver to help realize the assets’ full value. Overall, a fixed charge provides a powerful tool for both creditors and debtors, as it provides a clear and predictable framework for securing valuable assets.
Floating Charge
A floating charge is a form of security granted to a creditor over a company’s general assets that may change over time in the normal course of business, such as stock. Unlike a fixed charge, the company can continue to use and deal with the assets until an event of default occurs, at which point the charge “crystallises” and the creditor gains control over the assets.
In the event of default, the creditor can then appoint an administrative receiver to realize the assets and recover their debt. The net proceeds of sale are subject to the prior claims of any preferential creditors. Overall, a floating charge provides a flexible and powerful tool for securing a company’s assets while allowing it to continue its business operations as usual.
Fraudulent Trading
Fraudulent trading is a serious offense that occurs when a company or its directors engage in dishonest or deceitful conduct with the intention of defrauding creditors, shareholders, or any other parties involved in the business.
This typically involves carrying on the business with the intent to defraud or deceive, hiding or destroying financial records, or continuing to take credit knowing that there is no reasonable prospect of paying it back. Fraudulent trading can result in severe penalties, including personal liability for debts incurred during the period of fraudulent trading, disqualification as a company director, fines, and even imprisonment. As such, it is essential for companies and their directors to operate transparently and in good faith to avoid any risk of fraudulent trading.
Going Concern
When selling a business, IPs (insolvency practitioners) prefer to position it as a “going concern”. This means that the business will continue to operate as usual, which can help to save jobs and maintain the overall value of the business. By presenting the business as a going concern, IPs can often obtain a higher price for the business, as it is seen as a more stable and valuable asset.
This approach is generally preferred over a fire sale or other forms of liquidation, as it helps to preserve the business and its value for all parties involved. Overall, positioning a business as a going concern can lead to more positive outcomes and a better overall sale experience.
Insolvency
Insolvency refers to a financial state in which an individual or company is unable to meet their debt obligations. Specifically, insolvency is defined as having insufficient assets to pay all debts or being unable to pay debts as they become due.
In either case, a creditor who can establish this state of insolvency may present a winding-up petition, which can ultimately lead to the liquidation of the individual or company’s assets to repay outstanding debts. Insolvency can be a complex and challenging situation, but it is important to address it quickly and seek professional advice to minimise the impact on all parties involved.
Insolvency Act 1986
The Insolvency Act 1986 is the main piece of legislation that governs insolvency law and practice in the United Kingdom. This comprehensive Act covers a wide range of issues related to insolvency, including the procedures for bankruptcy, liquidation, administration, and voluntary arrangements.
While the Insolvency Act is the primary legislation, there are also many other statutes and statutory instruments that are relevant to insolvency, such as the Companies Act 2006 and the Enterprise Act 2002. These additional regulations and guidelines help to provide a more complete picture of the legal framework surrounding insolvency, and ensure that all parties involved are aware of their rights and responsibilities. Overall, the Insolvency Act and related statutes play a crucial role in shaping the practice of insolvency law in the UK.
Insolvent Liquidation
A company can go into insolvent liquidation when it enters into liquidation at a point where it does not have enough assets to pay off its outstanding debts, liabilities, and the expenses of liquidation. In this situation, the company is unable to meet its financial obligations and must be liquidated to repay its creditors. Insolvent liquidation can be initiated by the company’s directors or by its creditors, and it involves the appointment of a liquidator to oversee the process of liquidation.
The liquidator is responsible for selling the company’s assets and distributing the proceeds to its creditors in a fair and equitable manner. Insolvent liquidation can be a challenging and complex process, but it is often necessary to allow the company to close down in an orderly and fair manner.
Law of Property Act 1925
The Law of Property Act 1925 is a key piece of legislation in the UK that governs transactions in law and property. It outlines the rights and responsibilities of parties involved in property transactions, and provides a framework for resolving disputes related to property ownership and usage.
One area of particular relevance to insolvency is the Act’s statutory powers of receivers appointed under a fixed charge. These receivers are appointed by secured creditors to oversee the sale of specific assets that have been pledged as collateral, and to distribute the proceeds of the sale to the creditor in question. The Law of Property Act 1925 provides a clear legal basis for these receivers and helps to ensure that they operate within the bounds of the law. Overall, this Act plays a vital role in shaping the landscape of property transactions and insolvency proceedings in the UK.
LPA Receiver
A LPA (Law of Property Act) receiver is a professional appointed by a lender to take control of a property and manage it on behalf of the lender. This typically happens when a borrower defaults on a loan secured against a property. The receiver’s primary objective is to recover the outstanding debt owed to the lender by taking possession of the property, managing it, and eventually selling it to repay the outstanding loan.
The receiver has a range of powers and duties, including the power to take legal action, collect rent, and manage the property to maximize its value. Their role is crucial in resolving a default situation and protecting the interests of the lender.
Licensed Insolvency Practitioner (IP)
An IP (Insolvency Practitioner) is a licensed professional who specializes in managing insolvency procedures. Only individuals who have been licensed by one of the Recognised Professional Bodies or the Secretary of State for Trade and Industry can act as an IP. They are the only persons who are legally authorized to act as an office holder in an insolvency, which means they are responsible for administering the insolvency process and ensuring that all creditors receive a fair distribution of assets.
The role of an IP is diverse and includes tasks such as investigating the affairs of the insolvent company, selling assets to raise funds to pay off creditors, and distributing any remaining funds to those owed money. The role of an IP is vital in insolvency cases as they ensure that the process is handled professionally and impartially.
Liquidation
Liquidation is a legal process that occurs when a company is unable to pay its debts and is required to be wound up. During liquidation, the company’s assets are sold off to pay off its debts and liabilities, and any remaining funds are distributed to shareholders. The aim of liquidation is to ensure that the company’s creditors are repaid to the best of the company’s ability and to close down the company’s operations.
This process can be initiated voluntarily by the company’s directors or shareholders or can be forced upon the company by its creditors through a court order. Once the liquidation process is complete, the company is officially dissolved, and its existence comes to an end.
Liquidation Committee
A liquidation committee is a committee appointed during the liquidation process of a company. The committee is responsible for receiving information from the liquidator regarding the progress of the liquidation process and providing approval or sanction for some of the liquidator’s actions.
Typically, the liquidation committee is made up of the company’s creditors, who have a vested interest in the distribution of the company’s assets. In some cases, shareholders may also be included on the committee. The committee’s main responsibility is to ensure that the liquidation process is conducted in a transparent and fair manner and that the interests of all stakeholders are taken into account. The liquidation committee plays an important role in the liquidation process, as it provides oversight and accountability for the liquidator’s actions.
Liquidator
A liquidator is an Insolvency Practitioner (IP) who is appointed to wind up a company during the liquidation process. The liquidator’s primary responsibility is to take control of the company’s assets and sell them off in order to pay off the company’s creditors.
The liquidator also has a duty to investigate the company’s financial affairs and report any wrongdoing to the relevant authorities. In addition, the liquidator is responsible for communicating with the company’s stakeholders, including shareholders and creditors, and keeping them informed about the progress of the liquidation process.
Members” Voluntary Liquidation (MVL)
A members’ voluntary liquidation is a type of solvent liquidation that occurs when a company has sufficient assets to pay off all its debts and liabilities. In this process, the shareholders of the company appoint a liquidator to realize the assets of the company and distribute the proceeds among the shareholders.
The liquidator’s primary role is to ensure that all creditors are paid in full, including any interest owed, within a period of 12 months. Once all debts and liabilities have been settled, any remaining funds are distributed among the shareholders. The process of a members’ voluntary liquidation is generally initiated by the company’s directors, who have determined that the company no longer needs to operate and can be wound up.
Misfeasance
Misfeasance is a legal term used to describe a breach of duty by a director or manager of a company in relation to the funds or property of the company. This breach of duty can take many forms, including theft, fraud, or other forms of financial misconduct. Misfeasance can have serious consequences for the company and its stakeholders, as it can result in the misappropriation of funds or assets that rightfully belong to the company.
In some cases, misfeasance can also result in legal action being taken against the director or manager responsible, which may include fines or imprisonment.
Mortgage
A mortgage is a type of loan that is secured by a transfer of an interest in land or other property as collateral. The purpose of a mortgage is to provide financing to the borrower while giving the lender a means of ensuring repayment of the loan. The borrower, also known as the mortgagor, transfers a legal interest in the property to the lender, also known as the mortgagee, as security for the loan. The mortgage is conditional upon the borrower repaying the loan in full, including interest, within a specified timeframe.
Once the loan is repaid, the lender reconveys the property back to the borrower. If the borrower defaults on the loan, the lender has the right to foreclose on the property and sell it to recover the outstanding debt. Mortgages are commonly used to finance the purchase of homes, but they can also be used for other types of property, such as commercial real estate or land.
Nominee
A nominee is an Insolvency Practitioner (IP) who is nominated in a proposal for an individual or company voluntary arrangement to act as supervisor of the arrangement. A voluntary arrangement is a formal agreement between a debtor and its creditors to repay debts over a period of time.
The role of the nominee is to review the debtor’s proposal and report on its feasibility and viability to the creditors. If the proposal is approved, the nominee becomes the supervisor of the arrangement and is responsible for ensuring that the debtor complies with the terms of the arrangement.
Office Holder
An office holder is a legal term used to describe a licensed insolvency practitioner who is appointed to take control of the affairs of an insolvent individual or company. The term includes a range of roles, such as liquidator, provisional liquidator, administrator, administrative receiver, supervisor of a voluntary arrangement, or trustee in bankruptcy.
The primary role of an office holder is to manage the insolvent estate and maximize the return to creditors, while ensuring compliance with relevant laws and regulations. The office holder has broad powers to investigate the affairs of the insolvent entity, to collect and distribute assets, and to take legal action against individuals or companies who owe money to the insolvent entity.
Official Receiver (OR)
An official receiver (OR) is a civil servant who is an officer of the court and a member of the Insolvency Service, which is an Executive Agency of the Department for Business, Energy and Industrial Strategy (BIS) in the UK. The OR is responsible for administering bankruptcies and compulsory liquidations under the supervision of the court.
Their duties include investigating the affairs of the debtor, collecting and realizing assets, and distributing the proceeds to creditors. The OR also has the power to take legal action against individuals or companies who owe money to the insolvent entity.
Preference
In insolvency law, a preference is a payment or other transaction made by an insolvent company which places the receiving creditor in a better position than they would have been otherwise. Preferences are generally viewed as unfair to other creditors, as they result in one creditor receiving a greater share of the insolvent estate than they would have received if the payment had not been made.
In many cases, preferences are made to repay debts owed to a favored creditor or to secure future business from that creditor. Insolvency law provides for the recovery of preferences, allowing the liquidator or trustee in bankruptcy to claw back the payments made within a specified period of time before the insolvency occurred.
Preferential Debts
Schedule 6 of The Insolvency Act 1986 sets out the priority order for the distribution of funds by a liquidator, administrator, or administrative receiver in an insolvency situation. The priority order is designed to ensure that certain classes of creditors are paid before others, based on the nature of their claims.
The priority creditors include the costs and expenses of the insolvency proceedings, such as the fees of the liquidator or administrator, followed by preferential creditors such as employees who are owed certain types of debts, such as arrears of wages and holiday pay. Next in line are secured creditors, who have a charge over the assets of the insolvent company, followed by unsecured creditors, who do not have any security over the assets.
Finally, any surplus funds are distributed to the shareholders of the company. The priority order helps to ensure that creditors are treated fairly and that the assets of the insolvent estate are distributed in an orderly and transparent manner.
Proof of Debt
In insolvency proceedings, a proof of debt is a document submitted by a creditor to the insolvency practitioner or official receiver, giving evidence of the amount of the debt owed to them by the insolvent company. The proof of debt is a crucial document in the insolvency process, as it helps to establish the amount of the creditor’s claim and their position in the priority order for the distribution of funds.
The proof of debt typically includes details of the creditor’s name and address, the amount of the debt, the nature of the debt, and any supporting documentation, such as invoices or contracts. It is important for creditors to submit their proof of debt in a timely and accurate manner, as any delay or inaccuracies can result in their claim being rejected or delayed.
Provisional Liquidator
A provisional liquidator is an insolvency practitioner who is appointed to safeguard a company’s assets in the period between the presentation of a winding-up petition and the making of a winding-up order. The role of the provisional liquidator is to preserve and protect the assets of the company, pending the determination of the winding-up petition.
The appointment of a provisional liquidator is often made in situations where there is a risk of dissipation or misuse of the company’s assets, such as where there is suspected fraud or mismanagement. The provisional liquidator has a duty to act in the best interests of the creditors and the company, and to report to the court on the financial position and affairs of the company.
Proxy
A proxy is a document by which a creditor authorizes another person to represent them at a meeting of creditors. The proxy is typically used when the creditor is unable to attend the meeting in person and wishes to be represented by a trusted representative, such as an insolvency practitioner or solicitor.
The proxy document sets out the details of the creditor’s claim and instructions for how the representative should vote on their behalf at the meeting. The representative must act in the best interests of the creditor and ensure that their rights are protected and upheld during the meeting.
Proxy holder
A proxy holder is a person who attends a meeting on behalf of someone else, typically a shareholder or creditor who is unable to attend in person. In the context of insolvency proceedings, a proxy holder is often appointed by a creditor to represent their interests at a meeting of creditors.
The proxy holder is responsible for voting on behalf of the creditor according to their instructions, ensuring that the creditor’s views and interests are represented at the meeting. Proxy holders are typically professionals such as insolvency practitioners or solicitors, who have expertise in navigating the complexities of the insolvency process and ensuring that creditors’ rights are protected. The appointment of a proxy holder can be an important way for creditors to participate in the insolvency process, particularly if they are unable to attend meetings in person.
Receiver
The term “receiver” is often used to describe an administrative receiver. This is a type of insolvency practitioner who may be appointed by a secured creditor holding a floating charge over a company’s assets. The administrative receiver’s primary duty is to act in the interests of the secured creditor and to take control of the company’s assets in order to realize them and repay the debt owed to the creditor.
The appointment of an administrative receiver can be a powerful tool for a secured creditor, as it allows them to take swift and decisive action to recover their debt. However, it can also be a difficult and complex process, and it is important for both the creditor and the receiver to fully understand their rights and responsibilities under the law.
Receivership
Receivership is a legal process in which an insolvency practitioner is appointed to take control of the company’s assets and manage its affairs on behalf of the creditors. This can occur in a variety of situations, such as when a company is unable to meet its financial obligations or when a secured creditor appoints a receiver to recover debt owed to them.
Recognised Professional Body (RPB)
A recognised professional body (RPB) is an organisation that has been officially recognised by the Secretary of State for Trade and Industry as having the authority to license and regulate its members to act as insolvency practitioners (IPs). The main RPBs in the UK include the Institute of Chartered Accountants in England and Wales, the Association of Chartered Certified Accountants, and the Institute of Chartered Accountants of Scotland.
These organisations are responsible for ensuring that their members meet certain professional standards and qualifications in order to practice as IPs, and they play an important role in regulating the insolvency profession in the UK.
Secured Creditor
A secured creditor is a creditor who holds a security interest or charge over some or all of the debtor’s assets. This gives the creditor specific rights and priority over other creditors in the distribution of the debtor’s assets.
When the debtor’s assets are sold, the secured creditor is entitled to be paid first from the proceeds of sale before other creditors receive any payment. Common examples of secured creditors include banks or other financial institutions that have lent money to the debtor and taken security over property, such as real estate or equipment.
Security
A security refers to a financial instrument that represents ownership in an asset or a debt obligation. However, in the context of insolvency, a security refers specifically to a charge or mortgage over assets that is taken to secure payment of a debt. This means that the lender has the right to sell the charged assets if the debt is not paid. A security can be taken over a variety of assets, including real estate, equipment, inventory, and accounts receivable.
The security interest gives the lender a priority claim on the proceeds of any sale of the charged assets, ahead of other unsecured creditors. In insolvency proceedings, the sale of charged assets can be a contentious issue, as the lender’s rights may conflict with the interests of other creditors or the company’s stakeholders.
Shadow Director
A shadow director is someone who does not have an official position as a director but whose instructions or directions the actual directors of a company habitually follow. They can be held liable for certain actions in the same way as formal directors. The Companies Act 2006 defines a shadow director as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”.
This definition is intentionally broad to cover a wide range of circumstances where someone is exerting influence over the actions of a company’s directors, even if they are not formally appointed as a director.
Statutory Demand
A statutory demand is a formal demand for payment of a debt owed by an individual or company. It is a legal document that can be issued by a creditor, and it sets out the amount owed and a deadline for payment. If the debt is not paid within the deadline, the creditor can apply to the court to wind up a company or make an individual bankrupt.
Statutory demands can be used as a way to pressure debtors to pay their debts, and they can also be used as evidence in court proceedings.
Supervisor
A supervisor is an insolvency practitioner who is appointed by creditors to oversee the implementation of a voluntary arrangement. A voluntary arrangement is a legal agreement between a company and its creditors to repay all or part of its debts over a specified period of time.
The supervisor is responsible for ensuring that the company complies with the terms of the arrangement and makes the agreed payments to creditors. They also have the power to vary or terminate the arrangement if necessary.
Transaction at an Undervalue
A transaction at an undervalue is a transaction made by a company that results in it receiving no or less value than the value of what it provides. This type of transaction is often entered into by a company with the intention of depriving its creditors of the value of its assets.
In an insolvency situation, a transaction at an undervalue can be challenged by a liquidator or administrator, who may seek to have the transaction set aside in order to recover the value of the asset for the benefit of the company’s creditors.
Unsecured Creditor
An unsecured creditor is a creditor without any security over a debtor’s assets. Unsecured creditors are paid after secured creditors and preferential creditors in an insolvency process. They are exposed to a higher risk of not receiving payment, as they have no security over any assets in the event of the debtor’s insolvency.
Examples of unsecured creditors include suppliers, contractors, and customers who have paid for goods or services that have not been provided.
VAT Bad Debt Relief
VAT bad debt relief is a relief provided to businesses that have sold goods or services and charged Value Added Tax (VAT), but the customer has not paid the VAT due and the debt is deemed to be a bad debt. When a debt is considered bad, a business can claim the VAT back from HM Revenue & Customs (HMRC) as bad debt relief.
This can help to reduce the impact of unpaid debts on a business’s cash flow. In order to claim VAT bad debt relief, businesses need to meet certain criteria, including that they must have accounted for and paid the VAT to HMRC in the first place, and they must have written off the debt as bad.
Winding-up Order
A winding-up order is a court order that compels the compulsory liquidation of a company. It is typically sought by creditors who are owed a significant amount of money by a company that is unable to pay its debts.
Once the order is granted, an official receiver or a liquidator is appointed to take control of the company’s assets and wind up its affairs. The purpose of the winding-up process is to pay off the company’s creditors and distribute any remaining assets to its shareholders.
Winding-up Petition
A winding-up petition is a legal request made by a creditor, company director, or shareholder seeking to wind up a company and liquidate its assets to pay off outstanding debts. The petition is filed with the court and if accepted, it triggers a legal process that can lead to the company being dissolved.
Before filing a winding-up petition, the creditor must be owed at least £750 and must have given the company a formal demand for payment, known as a statutory demand. Once a winding-up petition is issued, the company’s bank accounts are usually frozen, and it may not be able to trade or access its assets without the court’s permission.
Wrongful Trading
Wrongful trading is a term used to describe the conduct of directors of a company who continue to trade when they know, or should have known, that there is no reasonable prospect of avoiding insolvent liquidation. The Insolvency Act 1986 imposes a duty on directors to take every step with a view to minimising the potential loss to the company’s creditors if the company is insolvent, or may become insolvent.
If directors continue to trade, despite knowing that the company is insolvent, they can be held personally liable for the company’s debts that are incurred during the period of wrongful trading. Wrongful trading is a serious offence and can result in disqualification as a director, personal liability for the company’s debts and potentially criminal sanctions.
Conclusion
Insolvency terminology in the UK includes a wide range of terms and concepts that are used in the context of corporate insolvency and bankruptcy proceedings. These include terms such as administration, liquidation, receivership, winding-up petition, wrongful trading, and many others.
These terms are defined and regulated by the Insolvency Act 1986, which sets out the legal framework for insolvency proceedings in the UK. Understanding these terms and concepts is essential for anyone involved in the insolvency process, including creditors, directors, and insolvency practitioners.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.