This glossary is provided as general guidance to help explain some common insolvency terms. It does not cover every insolvency term and many of the terms can have different meanings in different contexts that are not covered here. If you require specific advice about insolvency you should seek professional advice.
- Accountant in Bankruptcy ("AIB")
A Government agency responsible for administering and supervising personal insolvency procedures. Certain statutory documents for corporate insolvencies also need to be lodged with the AIB.
Legislation sets down the periods to which the Insolvency Practitioner must submit claims for remuneration and adjudicate on creditors' claims. Generally, in a sequestration this is 12 months from the award of sequestration and each 12 month period thereafter. In administrations the accounting periods are six months from the commencement of the administration and each six months thereafter. For liquidations the accounting periods are six months from the date on which the liquidator was appointed, six months from the end of the first accounting period and then every 12 months thereafter.
An administration is a corporate insolvency process which places an entity under the control of licensed Insolvency Practitioners (Administrators) with the protection of the Court, so as to manage the entity’s affairs, business and property. The main purpose of an administration is to rescue the entity as a going concern; failing that, the other statutory purposes are to achieve a better result for creditors as a whole than would be achieved in a liquidation, or where this is not possible, to realise property to enable funds to be distributed to secured or preferential creditors.
The duration of an administration is restricted to 12 months from the date of commencement unless it is extended by creditors or the Court. Approval for an extension is only given where it is deemed necessary and appropriate to the case.
A personal bankruptcy where the Accountant in Bankruptcy is appointed Trustee but the administration of the estate is contracted out to a licensed Insolvency Practitioner.
- Agent for the Accountant in Bankruptcy
A party appointed by the Accountant in Bankruptcy to administer a sequestration on their behalf (see Agency Sequestration).
An agent is a third party appointed to assist the Insolvency Practitioner (‘IP’) with their work, most commonly in the valuation and sale of physical assets, for example machinery and properties.
An asset is any source of value owned by the entity.
An order issued by the Court, The Accountant in Bankruptcy or any party authorised (Certificate Sequestration) under which an individual, unincorporated body or partnership is declared bankrupt and a Trustee is appointed.
- Bankruptcy Restrictions Order (BRO)
A Bankruptcy Restrictions Order is an order of the Court extending the restrictions of bankruptcy for a period of between two and fifteen years. A bankrupt may agree to give a Bankruptcy Restrictions Undertaking (BRU) which has the same effect as a BRO.
Book debts are monies owed to an entity.
- Break-up sale (or forced sale)
A break-up sale is where trading ceases and the assets of an entity are sold off separately, rather than the business being sold as a trading concern (sometimes referred to as a going concern).
Any meeting of shareholders or creditors convened by the Insolvency Practitioners (‘IPs’) must have a chair. This should be the IPs or a member of staff suitably experienced in insolvency matters.
A charge is a form of security taken by a creditor over assets of an entity, for a debt owed to them. Where security is taken over any assets of a limited company, the charge must be registered at Companies House to ensure that it becomes a public record.
A charge holder is a creditor who has the benefit of a legal charge (also called security) over some or all of an Entity’s assets.
A Committee (also known as the Creditors’ Committee or in liquidations, the Liquidation Committee) is a group of between three and five creditors or members who are appointed to assist the IP with their duties. A Creditors’ Committee can be formed as a result of a decision procedure at any time during the course of an administration or liquidation. Creditors will be invited to consider whether a Creditors’ Committee should be established, provided sufficient creditors are willing to be members of the committee. The role of the Committee varies depending on the insolvency procedure but they will generally assist with key decision-making, may approve the officeholder’s fees and may approve the scheme of division. The Committee may also approve the settlement of legal accounts in a liquidation without the requirement to submit these to the court for taxation. It is up to the creditors whether they wish to appoint a Committee; there is no requirement to do so.
Commissioners are a group of between one and five creditors who are appointed to assist the Insolvency Practitioner with their duties in a sequestration. The statutory function of the Commissioners is to help the trustee to discharge their responsibilities, such as assisting with key decision making, approving the Trustee's receipts and payments accounts, schemes of division and remuneration. They may also agree the payment of legal accounts without the requirement to submit these to the court for taxation. It is up to the creditors whether they wish to appoint Commissioners; there is no requirement to do so.
- Company Voluntary Arrangement ('CVA')
A Company Voluntary Arrangement (‘CVA’) is a formal insolvency procedure in which a proposal is presented to a company's shareholders and creditors seeking to compromise some or all of the company's liabilities over a period of time. Creditors and shareholders vote on the acceptance or rejection of the CVA proposals. If the proposals are approved, then all creditors are bound by the arrangement.
A liquidation ordered by the Court following the presentation of a winding-up petition. It is the only method by which a creditor can initiate a liquidation of an entity which owes it money. An Insolvency Practitioner (‘IP’) is initially appointed as either provisional liquidator or interim liquidator. A permanent liquidator will subsequently be appointed in place of the interim liquidator, although a provisional liquidation may simply be terminated.The purpose of the liquidation is to realise the entity’s assets and distribute them amongst the entity’s creditors / shareholders.
Consideration is a legal term referring to something of value promised to another when entering into a contract (i.e. the price paid in return for the assets of a business).
A contingent liability is a liability that is not certain but might arise if a certain event occurs, for example if an entity loses a legal case resulting in an amount of compensation becoming payable by that entity.
An individual (usually another Insolvency Practitioner) appointed by the Court to audit and comment on the level of the liquidator's remuneration request, receipts and payments (intromissions) and scheme of division.
A creditor is anyone who is owed money by an Entity.
- Creditors' Voluntary Liquidation ('CVL')
A Creditors’ Voluntary Liquidation (‘CVL’) is an insolvent liquidation. It begins with the shareholders resolving to place the entity into liquidation and appointing a liquidator. The directors of the company must then seek a decision of the company’s creditors, at which time the creditors make a decision to confirm the shareholders’ choice of liquidator or appoint a different liquidator. The purpose of the CVL is to realise the entity’s assets and distribute the money received for them amongst the entity’s creditors. A CVL can also be used to distribute money to creditors following an administration.
A cross guarantee (‘CG’) is a guarantee given to a creditor (usually a bank) by several entities, where the creditor is owed money by one or more of the entities but all are liable to repay it.
Crown debts are amounts owed to the Government. Most often this refers to amounts owed to the tax authorities.
- Debt Arrangement Scheme ('DAS')
A debt management programme run by the Scottish Government available to residents of Scotland. The scheme allows individuals the opportunity to repay their debts over an extended period of time, through what is termed a Debt Payment Programme (‘DPP’). The scheme also provides protection from any creditor action. The DAS, if approved, will freeze all interest, fees and charges on the debt, resulting in these additional charges being written off if the Payment Programme is successfully completed.
A debenture is a legal document acknowledging that an entity undertakes to repay a sum of money it has borrowed from a lender. This document effectively sets out the terms of the loan agreement.
A debt is an amount of money owed.
A debtor is an entity who owes a debt.
A decision procedure is the process by which an officeholder can ask creditors to make decisions on certain matters in insolvency proceedings. Insolvency legislation sets out four methods by which an officeholder can seek decisions from creditors being: correspondence, an electronic meeting, a virtual meeting or a requisitioned physical meeting (a physical meeting can only be convened if specifically requested by the required number of creditors). The decision procedure used will depend on the case and the decision being sought. Officeholders can also seek decisions using deemed consent but this is not a formal ‘decision procedure’ as set out in legislation. At least one vote must be received in order for a decision to be passed. If the requisite number of creditors vote against the decision it will not be passed. If creditors vote against the decisions proposed, the officeholder must seek decisions from creditors again using a further decision procedure (it can be the same decision procedure previously used). Creditors can also request that the officeholder hold a physical meeting of creditors if they meet the requisite threshold required for convening a meeting (please see the FAQs for further guidance).
A Declaration of Solvency is a statement sworn by the directors as part of a Members’ Voluntary Liquidation (‘MVL’) process. It is a statement of the company’s assets and liabilities at a given date, not more than five weeks prior to the date of liquidation, which states that the company can repay all of its creditors in full, with interest, within 12 months of the commencement of the winding-up.
The deemed consent procedure is not a decision procedure but can often be used instead of a decision procedure to obtain a decision from creditors. A decision will be treated as having been made by creditors under the deemed consent procedure on a decision date set by the Insolvency Practitioner, unless they object to the proposed decision. The decision date must be set such that it provides creditors with sufficient notice to consider the decision and object of they so wish. Such notice periods are set by insolvency legislation and differ for different insolvency procedures. The key difference between deemed consent and a decision procedure is that there is no actual voting by creditors.
Deferred consideration is where sales proceeds are payable over a period of time rather than in one lump sum at the date of the sale.
A director is a person who is responsible for directing and managing the affairs of an entity.
Disbursements are expenses which have been incurred by the Insolvency Practitioners in administering the insolvent estate.
Dissolution is the process by which an entity ceases to exist and is removed from the register maintained at Companies House.
A distribution is a payment from the insolvent estate to any creditor. Payments to secured creditors are typically referred to in absolute terms (for example £50,000) whereas payments to other creditors are normally referred to as dividends and are expressed in terms of pence in the £.
A dividend is a payment made to preferential or unsecured creditors in respect of their claims. Dividends are normally stated as a number of pence in the £.
The EU Regulation has a direct effect on all member states in the European Union (except Denmark) and govern how insolvencies are dealt with where they involve more than one member state.
A person, partnership, organisation or business that has a separately identifiable legal existence (for example a company or a limited liability partnership).
A fixed charge holder has a charge (also referred to as security) over specific assets of an entity which entitles the charge holder to take control of those assets and use them to satisfy the debt if it is not paid. The charged assets cannot be sold without the consent of the fixed charge holder.
A floating charge holder has a charge (also referred to as security) over some or all of the assets of an entity which are not specifically covered by standard securities. These assets may change over time (e.g. stock) as the entity is able to use the assets without the consent of the charge holder in the ordinary course of business. The charge holder will be entitled to receive the proceeds of sale of the assets to settle their debt; however, amounts must first be set aside to pay the preferential creditors and any Prescribed Part.
A guarantee is a legal obligation to repay a debt if the original borrower fails to do so. Directors may give guarantees, known as Personal Guarantees, (‘PGs’) in return for lending.
Land or buildings held for an indefinite period under absolute rights of ownership.
A legal process where a creditor registers an interest in a heritable property owned by the insolvent preventing them from selling, transferring or disposing of the property without discharging the creditor's claim. An inhibition is effective for five years after which it ceases to have effect unless action is taken to re-register it. Inhibitions are registered at the Register of Inhibitions and Adjudications in Edinburgh.
- Insolvency Act 1986 ('the Act')
The Insolvency Act 1986 is the primary legislation governing corporate and personal insolvency law and practice.
- The Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018
The Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018, set out in detail how Insolvency Practitioners should comply with the provisions of the Insolvency Act 1986 specifically in relation to company voluntary arrangements and administration cases. The Scottish insolvency rules come in two parts: The Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018 and The Insolvency (Scotland) (Receivership and Winding Up) Rules 2018.
- The Insolvency (Scotland) (Receivership and Winding Up) Rules 2018
The Insolvency (Scotland) (Receivership and Winding Up) Rules 2018, set out in detail how Insolvency Practitioners should comply with the provisions of the Insolvency Act 1986 specifically in relation to receiverships, creditors’ voluntary liquidations, members’ voluntary liquidation and court liquidations. The Scottish insolvency rules come in two parts: The Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018 and The Insolvency (Scotland) (Receivership and Winding Up) Rules 2018.
- Insolvency Practitioner ('IP')
An Insolvency Practitioner (‘IP’) is a person licensed by a Recognised Professional Body (‘RPB’) to act in insolvency matters.
An individual or entity is insolvent if it is unable to pay its debts when they fall due for payment and/or it has insufficient assets to cover its debts.
The appointment of a liquidator on the granting of a winding-up order by the court following the presentation of a winding-up petition. This either follows a provisional liquidation or in certain cases can be the first appointment, for example, HM Revenue & Customs petitions. A permanent liquidator will subsequently be appointed in place of the interim liquidator, which can be the same person, or an alternative liquidator.
Liquidation is the process by which a company’s assets are realised and distributed to satisfy, as far as it is able, its creditors and, if applicable, shareholders. The term winding-up is also used. Liquidation is usually a terminal process, followed by the dissolution of the company.
A liquidator is a licensed Insolvency Practitioner appointed to wind-up the affairs of a company.
A liability is a legal obligation to pay a person or entity.
- Low Income Low Assets "LILA"
A route into sequestration where gross earned income (excluding benefits) is less than the equivalent of the minimum wage, or in receipt of tax credits, assets are less than £10,000 with no individual assets worth over £1,000 (except a car valued at £3,000 or less) and the debtor does not own land.
A member is a shareholder of a company or a partner in a partnership.
- Members Voluntary Liquidation ('MVL')
An MVL is a solvent liquidation where the shareholders appoint the liquidator to realise the assets and settle all the company’s debts, plus interest, in full within twelve months. Surplus assets are distributed to the shareholders (members).
A moratorium protects an entity from its creditors taking legal action to recover their debts during the period for which it is in force.
Net Property is the amount of money remaining from the realisation of floating charge assets after paying the expenses of an administration, liquidation, receivership or company voluntary arrangement and the preferential creditors, but before paying creditors who have floating charge security. This amount is used to calculate the level of Prescribed Part funds available for unsecured creditors.
A nominee is a licensed Insolvency Practitioner who considers whether a proposal for an individual, partnership or company voluntary arrangement should be put to members and creditors for approval.
An office holder is another term for an Insolvency Practitioner (‘IP’).
Expenses which have been reasonably and necessarily incurred by the Insolvency Practitioners in carrying out their duties in relation to the insolvent estate.
- Personal guarantees ('PG's)
A personal guarantee (‘PG’) is an agreement made by an individual that makes him/her personally liable for the debt that he / she is guaranteeing.
A petition is a document presented to the Court seeking to commence an insolvency process.
A physical meeting must be convened by officeholders if requested by the creditors before, or within five business days of a notice of a decision procedure being delivered to creditors. Such a notice will include the procedure to requisition a physical meeting. The creditor (or creditors) making the request must have a claim (or claims) that total:
- at least 10% of the total value of the creditor claims in the administration;
- at least 10% in number of the total number of creditors in the administration, or
- at least 10 creditors.
Such requests must include:
- a list of the creditors concurring with the request, showing the amounts of their respective debts;
- written confirmation of their agreement from each concurring creditor; and
- a statement of the purpose of the proposed meeting.
Pre-administration costs are fees and expenses incurred by the administrator prior to the commencement of an administration with a view to the entity being placed into administration.
Preferential creditors have special rights allowing them to be paid ahead of unsecured creditors.
- Pre-pack administration ('pre-pack')
A pre-pack administration (‘pre-pack’) is an arrangement under which the sale of all or part of an entity's business or assets is negotiated with a purchaser prior to the appointment of administrators, and the sale occurs immediately on, or shortly after, appointment.
The Prescribed Part is an amount of money set aside from the company’s net property for unsecured creditors in priority to the floating charge holder. It only applies if the floating charge was created after 15 September 2003. It is calculated as 50% of the first £10,000 of Net Property, plus 20% thereafter up to a maximum of £600,000.
A progress report is made available for all creditors within six weeks of every six month period that elapses in an administration and every 12 month period that elapses in a liquidation, unless a progress report is issued earlier as a final progress report. The Insolvency (Scotland)(Company Voluntary Arrangements and Administration) Rules 2018 and The Insolvency (Scotland)(Receivership and Winding up) Rules 2018 set out the required content of a progress report which includes an estimate of the outcome for creditors.
- Proposals (also known as Paragraph 49 report)
Proposals (also known as a Paragraph 49 report) are sent to all creditors in administrations within eight weeks of appointment. The report details the administrators’ purpose and sets out their proposals for achieving that purpose. Creditors have an opportunity to vote on the proposals and may approve, reject or modify them.
A trust deed is a voluntary agreement between a debtor and their creditors to repay part, or all, of what they owe. The deed sets out the debtor’s assets and liabilities and their proposals for settlement. It is deemed approved unless the majority in number or a third in value of creditors object to its terms. Once protected the terms of the trust deed are binding on all of the creditors.
A provisional liquidation may occur after a petition to wind-up a company has been presented to the Court. This may be because there is concern that assets are at risk or because it is not in the 'public interest' for the company to continue trading. The assets and potential creditors are protected until the Court hears the winding-up petition. Alternatively, a provisional liquidation may take place to preserve a business until its financial affairs can be brought into order. A provisional liquidation can be recalled if the directors can settle the petitioning creditor's debt and expenses using third party funds (the company's assets cannot be used) and prove that the company is not insolvent.
A proxy is a person appointed by another entity to represent them at a meeting. They are entitled to attend the meeting and vote on behalf of the person or entity they are representing.
A proxy form must be completed by creditors or shareholders to appoint a proxy for a creditors' or shareholders' meeting.
- Qualifying Floating Charge holder ('QFC')
A Qualifying Floating Charge holder (‘QFC’) is a creditor who has a floating charge created on or after 15 September 2003.
- Receipts and payments account ('R&P')
A receipts and payments account (‘R&P’) is a statement of account detailing funds received and paid into an insolvent estate for a given period.
A receiver is a licensed Insolvency Practitioner appointed by a floating charge holder over specific assets defined in the charge (which is usually the whole or substantially the whole of a company’s assets). The receiver takes control of those assets and realises them for the benefit of the charge holder and have wide ranging powers to manage the company’s business as set out in Schedule 2 of the Insolvency Act 1986.
A receivership is a UK insolvency procedure in which a receiver is appointed by a creditor holding a valid floating charge (dated prior to 15 September 2003).
The primary objective of a receivership is to realise the charged assets in order to repay the debt due to the appointing floating charge holder. The receivers also have a duty to pay the preferential creditors and the costs of the receivership. Once the assets have been realised and distributions made to the secured and preferential creditors, the company will typically be dissolved (or struck off) and will cease to exist. Where there are sufficient funds to enable a distribution to unsecured creditors, as the receivers have no powers to distribute funds to the unsecured creditors, the surplus funds will be passed to a liquidator (who will be another insolvency practitioner from a different firm). The liquidator will agree the claims and make a distribution to creditors prior to the company being dissolved.
- Redundancy Payments Service ('RPS')
The Redundancy Payments Service (‘RPS’) is a Government department responsible for processing and paying employees’ claims following an insolvency. The RPS pay monies to employees for wages, holiday pay, redundancy and pay in lieu of notice based on certain statutory limits, which may be less than the amount owed to the employee.
Located in Edinburgh the Registrar of Companies holds a record of all limited companies and limited liability partnerships located in Scotland. The directors and Company Secretary of a company have a duty to ensure that the information held is kept up to date and in insolvency, various documents must be filed by the Insolvency Practitioner on the company’s behalf.
- Registrar of Inhibitions & Adjudications
A public register of those parties who are unable to grant good title to heritable property. An entry can be made preventing the party from transacting with the property.
A public register maintained by the Accountant in Bankruptcy (‘AiB’) that records details of all sequestrations. It also contains details of protected trust deeds and details of companies in liquidation and receivership since 1 July 1999.
Remuneration is paid to the Insolvency Practitioners their work on the insolvent estate. In all types of proceeding it is subject to approval by creditors and shareholders.
Resolutions are formal proposals put to shareholders and/or creditors on which they can vote in person or by proxy.
- Retention of Title ('RoT')
Retention of Title (‘RoT’) is a legal clause which provides that ownership of goods sold does not pass to the purchaser until the goods have been paid for in full.
A summary of the dividend to be paid on each of the creditor's claims. These should be submitted within two weeks of the end of each accounting period to either (depending on the type of insolvency) the Accountant in Bankruptcy, the Commissioners, the Committee or the Court for approval.
A secured creditor has a charge (also referred to as security) over assets of an entity (see fixed and floating charge holder above).
An official and permanent record maintained by the Insolvency Practitioner (‘IP’) in each insolvency containing specified statutory documents, which can be inspected by any interested persons. In corporate cases this must be retained for a period of six years from the later of the IP being granted release or the date on which any security or caution maintained in that case expires or ceases to have effect. In a sequestration the Sederunt book is sent to the Accountant in Bankruptcy when the trustee applies for their discharge.
A term for formal bankruptcy of an individual, unincorporated body or partnership. Sequestration is awarded by the Court or any party who is authorised to do so (a certificate sequestration). Sequestration can be awarded on the application of a creditor, an individual can apply for their own sequestration or a trustee under a Trust Deed can apply for a debtor’s sequestration. The trustee realises the debtor’s estate and distributes this to the creditors. Sequestration prevents the creditors from pursuing the debtor for settlement of sums due to them before the date of sequestration.
Security granted over specific assets, such as goodwill or property, preventing the debtor from dealing with those assets without the consent of the secured creditor. It gives the secured creditor a first claim on the proceeds of sale.
- Statement of Affairs ('SoA')
A Statement of Affairs (‘SoA’) is an account prepared, normally by the directors, to show the value of assets and liabilities of an entity as at the date of appointment.
A statement of claim form is used by a creditor to submit a claim in an insolvency for monies owed.
- Statements of Insolvency Practice (SIPs)
Statements of Insolvency Practice (‘SIPs’) set out principles and key standards to which Insolvency Practitioners must adhere (in addition to insolvency legislation).
A statutory demand can be used to demand payment of a debt from an entity. On receiving a statutory demand, an entity has 21 days to settle the debt or reach an agreement with the creditor. If no settlement is reached and more than £750 is outstanding, a winding up petition may then be issued.
A supervisor is an Insolvency Practitioner appointed to supervise a voluntary arrangement of either a partnership or company.
- Transfer of Undertakings (Protection of Employment) Regulations 2006 ('TUPE')
Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) provides that, in certain circumstances, on the sale of a business, employees of an entity have their employment contracts transferred to the purchaser.
A voluntary but formal arrangement that is used by Scottish residents where a debtor grants a ‘Trust Deed’ in favour of the trustee. This effectively transfers their estate to the trustee for the benefit of creditors for a defined period, normally four years. The debtor will also be required to make a regular monthly payment from their income for the duration of the Trust Deed. A Trust Deed will protect the debtor from the legal enforcement of debts which are included in the trust deed, but only once it has become protected.
A licensed Insolvency Practitioner appointed to manage and realise a debtor's estate in a sequestration or a trust deed.
An unsecured creditor is anyone who is owed money by an entity and holds no security for that debt, or who does not have preferential rights.
Please note, there are other insolvency glossaries available including: