We’ll start with the most common terms; the rest are listed alphabetically later.
This is where an individual or company cannot pay the debts they owe when they are due and/or the individual or company owes more than they own. People or companies in this situation can end up in a formal insolvency procedure (‘an insolvency’). Formal insolvency procedures are legal procedures designed to get debts repaid and to return individuals and, where possible, businesses to financial health.
Creditors and debtors
Creditors are the businesses or individuals who are owed money by others. Businesses or individuals that owe money are ‘debtors’.
Insolvency practitioners and Official Receivers and the Accountant in Bankruptcy (AiB)
Insolvency practitioners are the licensed independent specialists who are appointed to supervise formal insolvency procedures. Insolvency practitioners have to act in the interest of creditors – they can either help the debtor turn their finances around, or, when this isn’t possible, they will gather in all the debtor’s assets, turn them into cash and distribute the proceeds back to creditors (in accordance with an ‘order of priority’ determined by the government).
Insolvency practitioners are specially qualified and regulated accountants and lawyers; the Official Receivers (excluding Scotland) and AiB (Scotland only) are civil servants and employees of the government. Unlike insolvency practitioners, Official Receivers and the AiB are not licensed. Depending on the type of insolvency you’re involved in, you might come across all three. You can read more here.
It is important to remember that where an individual or company has become insolvent, it is very likely that they will not have enough money to pay back all that is owed. Insolvency practitioners, Official Receivers and the AiB will do their best to ensure that as much as possible is repaid.
Once formally appointed to look after an insolvent company or individual, the insolvency practitioners, Official Receivers and AiB may be referred to as ‘Office Holders’.
The term 'AiB' or 'Accountant in Bankruptcy' is used by the offices of the AiB in different ways to refer to different functions that it performs, including for example as an Agency of the Scottish Government. For the purpose of this website, we simply refer to the "AiB" in respect of all its various roles and functions.
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Administration is designed primarily to save all or parts of an insolvent company. During an administration, creditors aren’t allowed to pursue the insolvent company for the money they are owed; this is known as a ‘moratorium’. The moratorium is to ensure all creditors are treated fairly and to avoid a ‘free for all’ where some creditors might get a better outcome at the expense of others simply by being faster or more aggressive – a situation that, if allowed, could easily get dangerously out of control. Administrations are handled by an insolvency practitioner who will try and work out the best way to get creditors as much of their money back as possible. The insolvency practitioner may decide to re-organise the business to improve its performance or sell parts of it to raise money to pay back creditors. You might also hear the term ‘pre-pack’ administration. Pre-packs are where the sale of all or parts of a business is arranged before it enters administration. The sale is completed shortly after an administrator is appointed.A ‘pre-pack’ might be necessary because a lengthy insolvency procedure could cause a loss of confidence in the company: key contracts with suppliers or customers might be terminated because of the insolvency, key employees may leave because of uncertainty over their futures or there simply may be insufficient funds to trade the business. A pre-pack is one way of protecting as much value as possible in an insolvent business. Sometimes the business (or parts of it) is sold back to its original owners or management. This should only occur when this is the best offer on the table. Often, the owners or management are best placed to determine the value of the business, or they may be what makes the business valuable in the first place. Research has shown that pre-packs perform better than some other types of insolvency procedures when it comes to returning money to creditors and saving jobs and businesses. Pre-packs should only be used where it is expected to lead to the best deal for creditors.1 - 2<>A Company Voluntary Arrangement (CVA) is where creditors agree to reduced or rescheduled debt repayments which allows the insolvent company to survive. The original directors are generally allowed to retain control of the company. Liquidation is the procedure whereby a company is broken up and has its assets sold (or ‘liquidated’) to repay its debts. After liquidation, the insolvent company no longer exists. Liquidation is usually an option of last resort. A creditor or the company itself can start a liquidation procedure (known as a ‘Creditors’ Voluntary Liquidation’ or CVL). Compulsory liquidations are initiated through the court. Liquidations will involve an Official Receiver or an insolvency practitioner. In compulsory liquidations, in jurisdictions other than Scotland, the court will initially appoint an Official Receiver to act as a ‘liquidator’, in Scotland an insolvency practitioner will almost always be appointed to act as the ‘liquidator’. If the insolvent company or individual has significant assets, the case should be passed to an insolvency practitioner. All voluntary liquidations must be dealt with by an insolvency practitioner. Administrative Receivership is where a secured creditor (typically a bank) appoints an ‘administrative receiver’ (different to an Official Receiver) to take control of a company that cannot repay its secured debt. The receiver can choose to continue to run that company, or sell some or all of the assets in order to repay the secured creditor (and ‘preferential creditors’). Any funds or assets left over after this are returned to the company’s management. Often, this is followed by the liquidation of the company and the distribution of the remaining assets amongst unsecured creditors. In an effort to boost business rescue, the law was changed in 2000 to significantly curtail secured creditors’ ability to initiate administrative receivership proceedings. Since 2000, administrative receiverships have become quite rare (with business rescue procedures like administrations being used instead). During a bankruptcy – which typically lasts for one year – creditors are not allowed to pursue a debtor (‘the bankrupt’) to reclaim money owed to them. The Official Receiver, insolvency practitioner or AiB in Scotland is appointed to take charge of a bankrupt’s property. The trustee is allowed to sell the bankrupt’s property to raise money to repay creditors. This part of the process may take longer than the year-long protection offered by bankruptcy. At the end of the year, the bankrupt’s remaining pre-bankruptcy debts are written off (except for student loans, child support payments, and fines and debts incurred through fraud) and the debtor starts afresh.DROs are those with relatively low debts (under £20,000) and few or no assets (maximum of £1,000) i.e. those who are unlikely to be able to repay even a portion of their debt. The debtor is debt free (excluding student loans, child support payments and fines and debts incurred through fraud) after one year.DROs do not apply in Scotland.DMPs are an informal arrangement between creditors and a debtor. DMPs are not subject to the same legal or regulatory controls as formal insolvency procedures. They can last a number of years (sometimes decades) and are designed to ensure all debts are repaid.This is a formal binding agreement between a debtor and their creditors where creditors agree to a reduced or rescheduled debt repayment. Typically the debtor will contribute both existing assets and a proportion of future earnings to pay all or an agreed proportion of their debts. The Supervisor will collect in and then distribute these funds to creditors. IVAs usually last for between three and five years but can be shorter or longer.The Debt Arrangement Scheme (DAS) is the Scottish government’s scheme which allows someone with financial difficulties to repay their debts through a debt payment programme. All interest and charges are frozen from the date of commencement of the DAS, but the debtor repays all of the sums due to their creditors over an extended period. The DAS allows repayment of debts by individuals and businesses which are not companies to be repaid over a longer period of time, normally up to 10 years, but it could take longer than this. They are processed by the AiB as the DAS Administrator, but can be set up by insolvency practitioners, regulated Money Advice Advisors or regulated debt charities)A Protected Trust Deed is a personal insolvency procedure available to Scottish residents only. It is voluntary but formal arrangement between a debtor and their creditors. The debtor makes ‘affordable’ monthly payments towards their debt for typically four years. A debtor grants a ‘Trust Deed’ in favour of the Trustee which transfers their assets to the Trustee for the benefit of creditors. It is overseen by the Accountant in Bankruptcy.Administration
(these involve an insolvency practitioner – referred to as an ‘administrator’)Company Voluntary Arrangement
(overseen by an insolvency practitioner – referred to as a ‘Supervisor’)Liquidation
(this can be ‘compulsory’ where ordered by a court or ‘voluntary’ when initiated by the company’s shareholder(s))Administrative Receivership
(undertaken by an insolvency practitioner – referred to as an ‘administrative receiver’ or ‘admin receiver’.)Bankruptcy
(managed by an Official Receiver, Insolvency Practitioner or the AiB but may subsequently be passed to an insolvency practitioner – all are known as ‘trustees’ when involved in a bankruptcy). Bankruptcy is often known as Sequestration in Scotland.Debt Relief Orders - DRO(managed by the Official Receiver)Debt management plans – DMP(mostly handled by debt management companies or debt charities – not insolvency practitioners or Official Receivers)Individual Voluntary Arrangements – IVA (overseen by an insolvency practitioner – referred to as a ‘Supervisor’). IVAs are not available in Scotland.)Debt Arrangement SchemeProtected Trust DeedCorporate insolvencyPersonal insolvency
Terms you are likely to hear during insolvency
Insolvency practitioners are obliged to produce regular reports detailing their actions, including an account of what money they have received from insolvent companies and individuals and what has been paid out to creditors or as expenses to pay for the insolvency procedure (you might see this referred to as a receipts and payments account). In most forms of insolvency procedure, an annual report has to be provided within one month of the anniversary of the appointment of the insolvency practitioner or Official Receiver. In some insolvency procedures (including administrations in England and Wales), a report is required every six months.
Anything that belongs to an insolvent company or individual that may be used to repay their debts.
A right over a particular property or type of asset given to a creditor by a debtor when borrowing money as protection for that creditor against the non-payment of that debt. For example, when a bank lends money to an individual to buy a house, they take a ‘charge’ (or ‘mortgage’) over the property the loan is used to buy – if mortgage repayments are missed, the bank can take control of the property to repay the debt. This is known as a Standard Security in Scotland.
See also: Collateral; Security
This is something that someone taking a loan agrees to give up should they fail to repay that loan e.g. their home or a business’ equipment.
A member of a creditors’ committee in a Scottish bankruptcy (known as sequestration).
Someone owed money by an individual or business.
The creditors’ committee is a small group of creditors (usually between 3 and 5) who volunteer to represent the interests of all creditors in an insolvency. The exact role of a committee depends on the insolvency procedure (liquidation, administration etc.) but typically the creditors’ committee acts as a sounding board for the insolvency practitioner. They can also be asked to approve the fees and expenses of the insolvency practitioner on behalf of the wider creditor group. Creditors’ committees are not a feature of all types of insolvency procedure. There’s more information here.
These are formal or informal meetings of all creditors that are called by an insolvency practitioner handling an insolvency. A meeting is usually called at the outset of an insolvency proceeding and periodically thereafter. The purpose of the meeting depends on the type of insolvency, but it may be to impart information on the progress of the insolvency, to approve certain proposed actions by the insolvency practitioner or to approve fees and expenses. At the first such meeting there is usually an opportunity for creditors to ask the debtor (either an individual or an insolvent company’s directors) questions.
An individual or company who owes money.
Amounts owed by the individual or company.
A release of individuals subject to a bankruptcy or a Debt Relief Order from certain types of their debts.
These are creditors who have been granted rights (known as a ‘charge’, or ‘security’) to a specific property or asset belonging to the company or individual to whom money has been lent. If the loan is not paid back, the lender can take control of the asset the loan has been ‘secured’ against and sell it. Banks are a typical fixed charge creditor – mortgages are an example of a loan secured by a fixed charge or standard security.
These creditors are similar to fixed charge lenders, except their lending isn’t secured against a specific asset but to a general type, or ‘class’, of asset. For example, a company might grant a fixed charge to its bank for a loan used to buy the business’ warehouse, but might grant a floating charge over ‘all stock in the warehouse’ to another lender when it takes out an overdraft to buy stock and consumables. The floating charge lender has to accept that the exact goods (and their value) against which the loan is secured can vary over time.
Gazette (editions are published in London, Edinburgh, and Belfast)
An official government publication, which contains legal notices about new insolvencies and the details of appointed Office Holders. The Gazette also includes notices of any creditors’ meetings. You can see the Gazette website here.
The Insolvency Service is the government agency for insolvency in England and Wales. There is a separate Insolvency Service for Northern Ireland, and the AiB covers personal insolvencies in Scotland.
Insolvency Services Account (ISA)
The account at the Bank of England into which money raised from the sale of assets in bankruptcies and compulsory liquidations has to be paid. Money is then paid to creditors out of these accounts. The Insolvency Service charges fees on money paid into these accounts.
In a Scottish compulsory liquidation the insolvency practitioner appointed by the court when the ‘winding up’ order as made is called the interim liquidator. They act as liquidator until the initial meeting of creditors (within 28 days) appropriate their appointment, or appoints an alternative.
An interim receiver might be appointed by a court to protect and secure an insolvent individual’s property after a bankruptcy petition has been made to the court, but before the bankruptcy ‘order’ has been made.
In administrations and creditors voluntary liquidations an insolvency practitioner has an obligation to carry out an investigation into the conduct of the director(s) of the failed business and will welcome any input from creditors. If you have any additional information that may be helpful, please get in touch with the insolvency practitioner as a matter of urgency.
The insolvency practitioner has to submit a confidential report on his findings to the Insolvency Service, who may decide to try and have the director(s) disqualified. If you think a director should have been disqualified but has not, you should write to the Insolvency Service and your local Member of Parliament (copying in your insolvency practitioner).
In compulsory liquidations and bankruptcy the duty to investigate and report falls to the Official Receiver. In Scotland, the insolvency practitioner carries out that duty.
Lien is the right to retain possession of assets or documents until the settlement of a debt.
An insolvency practitioner who carries out preparatory work for a voluntary arrangement before the arrangement begins.
Insolvency Practitioners can be appointed to cases initially dealt with by the Official Receiver (bankruptcies and compulsory liquidations) through a ‘rota’ of local insolvency practitioner firms. The aim of the rota is to ensure transparency and fairness of appointments.
The order in which creditors are repaid their debts as a result of an insolvency procedure is determined by something called the ‘Order of Priority’. This order, or hierarchy, has been set out by the government. At the top of the order are ‘secured’ lenders like banks; towards the bottom are ‘unsecured’ lenders like trade suppliers. Banks have priority so that they remain confident about lending large amounts of money to businesses. You can read more here.
A formal application made to court to have an individual made bankrupt or a business liquidated. These can be presented to the court by either creditors or debtors themselves. In Scotland, a petition can also be made to the court to appoint administrators.
Certain types of creditor debts are given a legal priority in terms of repayment from an insolvency. These include the employees of an insolvent business, although only for certain debts: unpaid wages; holiday pay; and pension contributions. Only up to a set amount (determined by the government) will be paid out.
You might hear these creditors referred to as ‘prefs’.
A legal form completed by a creditor in a bankruptcy (known as sequestrations in Scotland), liquidations, voluntary arrangements, and administrations to state how much they believe they are owed. You will usually be asked by the insolvency practitioner, Official Receiver, or AiB to provide any supporting evidence you have for your claim – copy invoices, delivery notes, statements, etc. It is helpful to provide this a quickly as possible.
You might see this referred to as a ‘Statement of Claim’ form in a voluntary arrangement or a Scottish insolvency.
A person or company can appoint someone to go to a creditors’ meeting and vote in their place – a proxy. This can be the chairman of the meeting. A ‘proxy form’ will need to be completed if a creditor wishes this to happen – if you need a proxy form and haven’t already been given one, you should speak to the Office Holder handling the insolvency in which you’re a creditor.
Several insolvency firms offer ‘creditor services’, including attending creditors’ meetings on clients’ behalves.
Realising an asset means selling it or disposing of it to raise money to repay creditors.
Retention of Title is where you, as a creditor, have an agreement with a customer that says the goods you have supplied remain your property until the customer has paid for them. If you have a Retention of Title claim to make, you need to let the insolvency practitioner or Official Receiver know as soon as possible and provide them with a copy of your terms and conditions as well as the details of your claim.
See ‘Retention of Title’
Section 98 Meeting
A creditors’ meeting held at the start of some insolvency procedures (required by Section 98 of the Insolvency Act 1986).
See ‘Fixed Charge’ Creditor.
The Scottish name for 'bankruptcy' (bankruptcy is often used but sequestration is the traditional name).
Statement of Affairs
A legal document, including a statement of truth completed by a bankrupt or a company’s representative, listing assets and debts.
See ‘Proof of Debt’
Statement of Insolvency Practice (SIP)
Statements of Insolvency Practice are usually referred to as SIPs. SIPs set principles and key compliance standards with which Insolvency Practitioners are required to comply
The insolvency practitioner who runs a company or individual voluntary arrangement.
The insolvency practitioner records time spent on a case so creditors can see what work has been done. The type of activity logged can include day-to-administration, responding to correspondence from debtors or creditors, attending creditors’ meetings, realising the assets of an insolvent business or individual, or investigating the conduct of an insolvent business’ directors. Details of the insolvency practitioner’s time records might be included in their Annual Report or progress reports to creditors.
These are creditors who are owed money by a business or individual, but who do not have a ‘charge’ to protect what they are owed. Unsecured creditors normally make up the bulk of creditors in an insolvency (in number rather than the size of debts). This group includes trade suppliers, employees owed redundancy pay, any unsecured loans, and HM Revenue & Customs (for unpaid taxes are an unsecured debt). In Scotland, unsecured creditors are also referred to as 'ordinary creditors' or creditors with 'ordinary debts'.
Creditors, directors and shareholders can petition the court to ‘wind-up’ i.e. liquidate a company.