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Glossary of Insolvency Terms

With the impact of COVID-19, there will inevitably be a rise in businesses or individuals engaged in insolvency procedures. We set out below some of the most commonly used insolvency terms.

Administration

Where a company is placed under the control of an insolvency practitioner and the Court. The administrator has statutory objectives of either saving the company so that it can continue trading, achieving a better result for creditors than in liquidation or if those objectives are not possible then to realise assets and distribute funds to creditors.

To be placed in administration a company must be insolvent or about to become insolvent (except if the company is placed in administration by a qualifying floating charge holder).

Administrative Receivership

Where an administrative receiver is appointed by a creditor who is the holder of a floating charge over the whole or substantially the whole of the company’s assets. The administrative receiver can carry on running the business and/or sell the assets.

Company voluntary arrangement (CVA)

A formal procedure whereby a proposal is presented to shareholders and creditors as to the payment of a company’s debts. The shareholders and creditors vote on whether they accept the arrangement and, if accepted, the agreement is legally binding.

Liquidation (or winding up)

When a company’s assets are realised and distributed by a liquidator (either the Official Receiver of an Insolvency Practitioner) to creditors. Assets are distributed to creditors in the order specified in the insolvency Act 1986. Liquidation can be a compulsory liquidation or voluntary liquidation.

Compulsory Liquidation

Where liquidation has been ordered by the Court following a creditor petitioning the Court for the company to be wound up.

Creditors Voluntary Liquidation (CVL)

When shareholders place a company in liquidation and appoint a liquidator. Creditors then can decide whether to keep or replace the chosen liquidator.

Members Voluntary Liquidation (MVL)

When a solvent company is placed in liquidation by the shareholders.

Winding-up petition

A petition presented to the Court requesting that the Court orders that a company be placed into compulsory liquidation.

Bankruptcy

A procedure that relates only to individuals. When the Court makes a bankruptcy order against an individual, their assets are realised by the Trustee to be distributed to creditors.

Individual voluntary arrangement (IVA)

When an individual reaches an agreement with creditors as to how their debt will be paid. This arrangement is controlled by an insolvency practitioner and requires the approval of 75% of the value of voting creditors. If an IVA is agreed, a Court can discharge a bankruptcy order against an undischarged bankrupt.

Official Receiver

A person employed by the Insolvency Service responsible for handling bankruptcy and compulsory liquidation.

Proof of Debt

A document submitted by creditors to an Insolvency Practitioner or Official Receiver setting out what they are owed.

Statutory Demand

A formal notice requiring payment of a debt. If the debt is not paid within 21 days the creditor can use the statutory demand as a ground to petition for bankruptcy of an individual or to wind up a company if the debt is £5,000 or more for an individual or over £750 for a company.

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