Part 3 Insolv Basics

Insolvency Act 1986
The Insolvency Act 1986 is the primary legislation governing insolvency law and practice. Nevertheless, many other statutes and statutory instruments are also relevant.
Insolvency Services Account
The Insolvency Services account is an account maintained at the Bank of England by the Department of Trade and Industry, for handling funds in liquidations and bankruptcies.
Insolvent Liquidation
A company goes into insolvent liquidation if its goes into liquidation at a time when its assets are insufficient for the payment of its debts and other
liabilities and the expenses of liquidation.
Insolvent Partnerships Order 1994 (IPO)
The Insolvent Partnerships Order 1994 is an Order setting out the procedures for dealing with insolvent partnerships. The order provides for winding up an insolvent partnership as an unregistered company, with or without concurrent insolvency proceedings against individual partners; for the joint bankruptcy of individual partners, without winding up the partnership as an unregistered company; and for the application of the administration and company voluntary arrangement procedures to insolvent partnerships.
Insolvency Practitioner (IP)
See Licensed Insolvency Practitioner.
Insolvency Rules
The Insolvency Rules 1986, as amended, provide the detailed working
procedures for the provisions of the Insolvency Act 1986.
Interim Order
An individual who intends to propose a voluntary arrangement to his creditors may apply to the court for an interim order which, if granted, precludes bankruptcy and other legal proceedings while the order is in force.
A judgement is:
1. recognition of a debt by a court
2. decision given by a court at the conclusion of a trial.
Law of Property Act 1925
The Law of Property Act 1925 governs transactions in law and property. Contains statutory powers of receivers appointed under a fixed charge.
LPA Receiver
Law of Property Act 1925 receiver is a person (not necessarily an insolvency practitioner) appointed to take charge of a mortgaged property by a lender whose loan is in default, usually with a view to sale or to collect rental income for the lender. Common in the case of the failure of a property developer, whose borrowings will largely be secured on specific properties.
Licensed Insolvency Practitioner (IP)
A licensed Insolvency Practitioner (IP) is a person licensed by one of the Chartered Accountancy bodies, the Law Societies, the Insolvency Practitioners’ Association or the Secretary of State for Trade and Industry. The only person who may act as an office holder in an insolvency. Persons claiming to be insolvency practitioners, but who do not hold a licence may not be able to help you. The status of anyone claiming to be a licensed insolvency practitioner can be confirmed by calling R3 or one of the regulatory bodies listed in Section 11 – Useful Contacts.
Lien is the right to retain possession of assets or documents until the settlement of a debt.
Liquidation is the process whereby a company has its assets realised and distributed to satisfy, insofar as it is able, its liabilities and to repay its shareholders. The term winding up is also used. Liquidation is usually a terminal process, followed by the dissolution of the company.
Liquidation Committee
A liquidations committee is a committee which receives information from the liquidator and sanctions some of his actions. Usually consists entirely of creditors, but may also comprise shareholders (see Creditors’ Committee).
A liquidator is a Licensed insolvency practitioner appointed to wind up a company.
Mareva Injunction
A Mareva Injunction is a court order preventing the disposal of assets.
Members’ Voluntary Liquidation (MVL)
A members’ voluntary liquidation is a solvent liquidation where the shareholders appoint the liquidator to realise assets and settle all the company’s debts, plus interest, in full within 12 months.
Misfeasance is a breach of duty in relation to the funds or property of a company by its directors or managers.
A mortgage is a transfer of an interest in land or other property by way of security, upon the express or implied condition that the asset shall be reconveyed to the debtor when the sum secured has been paid.
A nominee is a Licensed insolvency practitioner nominated in a proposal for an individual or company voluntary arrangement to act as supervisor of the arrangement.
Office Holder
An office holder is a liquidator, provisional liquidator, administrator, administrative receiver, supervisor of a voluntary arrangement, or trustee in bankruptcy.
Official Receiver (OR)
An official receiver (OR) is an officer of the court, civil servant, member of the Department of Trade Insolvency Service and deals with bankruptcies and compulsory liquidations.
Onerous Property
The term onerous property in the context of a liquidation or bankruptcy, applies to unprofitable contracts and to property that is unsaleable or not easily saleable or that might give rise to a continuing liability. Such property can be disclaimed by a liquidator or a trustee in bankruptcy.
Partnership Voluntary Arrangement
The term used informally to describe the company voluntary arrangement procedure as applied to partnerships under the provisions of The Insolvent Partnerships Order 1994.
A petitions is a written application to the court for relief or remedy.
A preference is a payment or other transaction made by an insolvent company or individual which places the receiving creditor in a better position than they would have been otherwise. A liquidator, administrator or trustee in bankruptcy may recover sums which are found to be preferences, if the transactions took place within a period of either two years (where the creditor is a connected person) or six months (in other cases) of the insolvency.
Preferential Debts
Defined in Schedule 6 of The Insolvency Act 1986. They have priority when funds are distributed by a liquidator, administrator, administrative receiver or trustee in bankruptcy.
Proof of Debt
Proof of debt is a document submitted by a creditor to the licensed insolvency practitioner or Official Receiver giving evidence of the amount of the debt.
Provisional Liquidator
Provisional liquidator is the name usually given to a licensed insolvency practitioner appointed, to safeguard a company’s assets after presentation of a winding-up petition but before a winding-up order is made.
A proxy is a document by which a creditor authorises another person to represent him at a meeting of creditors. The proxy may be a general proxy,
giving the proxy holder discretion as to how he votes, or a special proxy requiring him to vote as directed by the creditor. A body corporate can only be represented by a proxy.
Proxy holder
A proxy holder is a person who attends a meeting on behalf of someone else.
A receiver is often used to describe an administrative receiver, who may be Appointed by a secured creditor holding a floating charge over a company’s assets. More accurately, a receiver is the person appointed by a secured creditor holding a fixed charge over specific assets of a company in order to take control of those assets for the benefit of the secured creditor.
A receivership is the general term applied when a person is appointed as a receiver or administrative receiver.
Recognised Professional Body (RPB)
A recognised professional body is an organisation recognised by the Secretary of State for Trade and Industry as being able to authorise its members to act as licensed insolvency practitioners.
Relevant Date
A relevant date is the date by reference to which preferential claims are reckoned.
Reservation of Title (or Retention of Title)
Reservation of title (or retention of title) is a provision under a contract for the supply of goods which purports to reserve ownership of the goods with the supplier until the goods have been paid for. A complex and continually evolving area of law.
Scheme of Arrangement
A scheme of arrangement is a term normally used to describe a compromise or arrangement between a company and its creditors or members or any class of them under section 425 of the Companies Act 1985, which may involve a scheme for the reconstruction of the company. If a majority in number representing three fourths in value of the creditors or members or any class of them agree to the compromise or arrangement it is binding if sanctioned by the court. Section 425 may be invoked where there is an
administration order in force in relation to the company, where there is a liquidator or provisional liquidator in office, or where the company is not subject to any insolvency proceedings.
The term is also used in Section 1 of the Insolvency Act 1986 in relation to company voluntary arrangements.
Secured Creditor
A secured creditor is a creditor with specific rights over some or all of a debtor’s assets. A secured creditor gets paid first out of the proceeds of sale of the security.
A security is a charge or mortgage over assets taken to secure payment of a debt. If the debt is not paid, the lender has a right to sell the charged assets.
Security documents can be very complex. The commonest example is a mortgage over a property.
Shadow Director
A shadow director is a person who is not formally appointed as a director, but in accordance with whose directions or instructions the directors of a company are accustomed to act. However, a person is not a shadow director merely because the directors act on advice given by him in a professional capacity.
Special Manager
A special manager is a person appointed by the court in a compulsory liquidation or bankruptcy to assist the liquidator, Official Receiver or trustee in managing the insolvent’s business. He does not need to be a licensed insolvency practitioner.
Statutory Demand
A statutory demand is a formal notice requiring payment of a debt exceeding £750 within 21 days, in default of which bankruptcy or liquidation proceedings may be commenced without further notice. Cannot be used where the debt is disputed.
A supervisor is the licensed insolvency practitioner appointed by creditors to supervise the way in which an approved voluntary arrangement is put into effect.
Transaction at an Undervalue
A transaction at an undervalue can describe either a gift or a transaction in which the consideration received is significantly less than that given. In certain circumstances such a transaction can be challenged by an administrator, a liquidator or a trustee in bankruptcy.
Quite apart from its common usage (eg under the Trustee Act 1925) this is a term used for a variety of insolvency appointments, including the licensed insolvency practitioner appointed in an English bankruptcy, a Scottish sequestration, a deed of arrangement; a Scottish trust deed and an administration order (of the affairs of a deceased debtor).
Undervalue Transaction
See Transaction at an Undervalue.
Unsecured Creditor
An unsecured creditor, strictly, is any creditor who does not hold security. More commonly used to refer to any ordinary creditor who has no preferential rights, although, in fact preferential creditors will almost always also have an element that is unsecured. In any event, they are the last in the queue, apart from shareholders.
VAT Bad Debt Relief
VAT bad debt relief is the relief obtained in respect of the VAT element of an unpaid debt. Previously available only when the debtor became insolvent, relief is now available where debt is six months old at the relevant date.
Voluntary Arrangements
See Individual Voluntary Arrangement (IVA) and Company Voluntary
Arrangement (CVA).
Voluntary Liquidation
See creditors’ voluntary liquidation and members’ voluntary liquidation.
Winding up
See liquidation.
Winding-up Order
A winding-up order is an order made by the court for a company to be placed in compulsory liquidation.
Winding-up Petition
A winding-up petitions is a petition presented to the court seeking an order that a company be put into compulsory liquidation.
Wrongful Trading
Wrongful trading is a term applied to companies in liquidation where a director allowed the company to continue trading in circumstances where he should have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. The directors involved may be made personally liable to make a contribution to the company’s assets.
Section 8 – Glossary of Insolvency Expressions
for Scotland
Accountant in Bankruptcy
An accountant in bankruptcy is the court official appointed to monitor the sequestration procedures. He will generally act, where no insolvency practitioner is nominated on a petition or elected at a meeting of creditors, as interim trustee and as permanent trustee in very small estates, or on any estate if so appointed by the creditors. He may sub-contract certain duties to any authorised licensed insolvency practitioner. He will also act as a Commissioner if no appointments are made by the creditors.
Apparent Insolvency
Apparent insolvency is the point at which in given circumstances it is appropriate to present a petition for the winding-up of a company or an individual’s estate.
Arrestment is a legal process whereby a creditor stops payment by a third party holding funds due to the debtor. Release of funds effectively arrested requires the granting of a mandate by the debtor or the obtaining of a Decree of furthcoming from the court.
Diligence is the legal processes by which a creditor may pursue a debtor for recovery of a claim, once having obtained a Court Decree (which legally establishes the amount of his claim).
Floating Charge
A floating charge is a charge over assets of a company that cannot be secured by a standard security. The assets caught by the charge are those held by the debtor at the time the receiver is appointed. A receiver realises assets only for the benefit of a floating charge holder.
Gratuitous Alienation/Sale at Undervalue
Gratuitous Alienation/Sale at Undervalue is the disposal of property prior to insolvency for less than full value, and reducible by the trustee in certain circumstances.
Inhibition is a legal process whereby a creditor registers an interest in heritable property owned by a debtor, thereby barring the debtor from disposing of the property without discharging the creditor’s claim.
Interim Liquidator
An interim liquidator is appointed by the court on the granting of the winding-up order. His job is to convene a meeting of creditors who will appoint a liquidator.
Interim Trustee
An interim trustee is the trustee appointed by the court to deal with the safeguarding and administration of the debtor’s estate pending the creditors’ meeting. In the majority of small cases, the Accountant in Bankruptcy will be the appointee.
Permanent Trustee
A permanent trustee is the trustee subsequently appointed by the creditors or the court following upon the creditors’ meeting to deal with the realisation and distribution of the debtor’s estate. In small cases, the Accountant in Bankruptcy will generally be the appointed permanent trustee.
Protected Trust Deed
A protected trust deed is the same as a trust deed, but approved by creditors binding minority creditors. To defeat ‘protection’ within five weeks of intimation of the trust deed in the Edinburgh Gazette, creditors in excess of one third in value are required to notify the trustee that they will not accede.
Provisional Liquidator
A provisional liquidator is the licensed insolvency practitioner who may be appointed by the court to preserve a company’s assets pending the appointment of an interim liquidator and following immediately upon the service of a winding-up petition.
A receiver is the licensed insolvency practitioner appointed by a secured creditor holding a charge over specific assets of a company in order to take control of those assets for the benefit of the secured creditor.
Sequestration is the distribution of an insolvent estate of an individual or partnership.
Standard Security
A standard society is a fixed charge over heritable property.
Summary sequestration
A summary sequestration is a sequestration where the Assets do not exceed £2,000 and the Liabilities do not exceed £20,000. The procedure in a summary sequestration is curtailed to minimise costs.
Trust Deed
A trust deed is the deed which allows a debtor to transfer his estate voluntarily to a trustee for behoof of his creditors. The trustee will deal with the estate as provided for by statute. This means of administering an estate is unlikely to be used unless it is anticipated that there will be sufficient funds to meet the costs of the administration and pay a dividend to creditors.
Unfair Preference
Unfair preference is a transaction between a debtor and a creditor which has the effect of creating a preference in favour of that creditor to the prejudice of the general body of creditors other than in the normal course of trade, and thus is usually reducible by the trustee if the transaction took place within six months of insolvency.
Section 9 – R3 – The Association of Business Recovery Professionals
R3 was founded in 1990 to represent the professional interests of licensed insolvency practitioners in England, Scotland, Wales and Northern Ireland, of whatever relevant professional background.
In 2000, R3 amended its constitution to allow professionals to become members who specialised in business reorganisation and recovery but were not licensed insolvency practitioners.
R3 has become the voice of the business recovery and insolvency profession. All licensed insolvency practitioners throughout the UK are eligible for membership. In practice, at least 90% of all licensed practitioners have taken up membership of R3.
R3 provides more than just a unified and influential voice for business recovery and insolvency professionals, it also plays a major role in constantly improving already high standards of business recovery and insolvency expertise.
Increasingly, R3 is becoming a vital forum for anyone who needs to network with the business recovery and insolvency profession, both at national level and within their own business community.
There are many benefits to membership. R3 offers an unparalleled variety of courses and conferences and publishes a wealth of technical literature:
Technical Bulletins – technical updates and news of legislative developments.
Statements of Insolvency Practice – best practice guidelines issued for the benefit of all practitioners.
Recovery – quarterly magazine, featuring technical articles, news for and from members and students, committee issues, recent publications and course and conference updates.
In addition, much of this material is also published on R3’s internet sites; , which has sites for members only and the general public.
For those who are not eligible for membership, subscriber status still offers the opportunity to attend meetings, courses and to receive R3 publications.
R3’s objectives are to:
• represent the business recovery and insolvency profession to the government, the media and the public at large
• advance the theory and practice of business recovery and insolvency administration
• promote high standards of practice and professional conduct of licensed insolvency practitioners and other members of R3
• recruit a body of persons who are skilled and experienced in business recovery and insolvency administration and to train those who wish to attain skill and experience in these areas
• facilitate an exchange of views and opinions on, to promote a better understanding of, and to inform public and professional opinion on, the subject of business recovery, insolvency administration and connected problems.
R3 members come from a number of professional backgrounds and include insolvency practitioners who are licensed by the following professional bodies:
• The Association of Chartered Certified Accountants
• The Institute of Chartered Accountants in England and Wales
• The Institute of Chartered Accountants in Ireland
• The Institute of Chartered Accountants of Scotland
• The Insolvency Practitioners’ Association
• The Law Society
• The Law Society of Northern Ireland (for Northern Ireland only)
• The Law Society of Scotland.
Section 10 – Other R3 Publications
• The R3 Insolvency Practitioners Directory – updated annually.
• Making a Career as an Insolvency Practitioner
• Recovery magazine published quarterly.
• Insolvency Proceedings in the United Kingdom – A Guide for Overseas Practitioners.
• Technical Bulletins, Technical Releases, Technical Reminders and
Statements of Insolvency Practice (SIPs) are also issued by R3 for the guidance of insolvency practitioners.
R3 continually makes more information available for the benefit of creditors and debtors alike. Please contact R3 for further information.
Section 11 – Useful Contacts
The Chief Operating Officer Tel 020 7566 4200
8th Floor
120 Aldersgate Street
London EC1A 4JQ
The Insolvency Service Tel: 020 7291 6772
P O Box 203
21 Bloomsbury Street
London WC1B 3QW
The Association of Chartered Certified Tel: 020 7242 6855
29 Lincoln’s Inn Fields
London WC2A 3EE
Insolvency Practitioners Association Tel: 020 7623 5108
Valiant House
4-10 Heneage Lane
The Institute of Chartered Accountants Tel: 020 7920 8100
In England & Wales
P O Box 433
Chartered Accountants Hall
Moorgate Place
London EC2P 2BJ
Institute of Chartered Accountants Tel: 0131 347 0100
of Scotland
CA House
21 Haymarket Yards
EH12 5BH 48
The Law Society Tel: 0152 751 7141
Ipsley Court
Berrington Close
B98 0TD
The Institute of Chartered Tel: 00 353 1 637 7200
Accountants in Ireland
Chartered Accountants House
87/89 Pembroke Road
Dublin 4
Insolvency Practitioner Licensing Tel: 02890 548531
The Insolvency Service
Fermanagh House
28 Ormeau Avenue
Belfast BT2 8NJ
The Law Society of Scotland Tel: 0131 226 7411
The Law Society’s Hall
26 Drumsheugh Gardens

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