5 key insolvency terms explained
The issue of insolvency and what to do if your business is faced with this prospect can be quite confusing.
Below we have looked at five key phrases that are likely to come up when you’re dealing with insolvency practitioners, so you can be sufficiently prepared for the process.
A company or individual becomes insolvent when it can no longer pay its creditors, meet their debts when they are due or who find that their liabilities have outgrown their assets. In the UK, this is defined both in terms of cash-flow and in terms of balance sheet.
A company or individual’s liabilities are the debts and obligations it maintains while trading. These can range from a credit card to a large business loan from a bank or other creditors. All liabilities are the result of a transaction or arrangement made in the past and must be legally enforceable.
Bankruptcy can be defined as a particular insolvency procedure that applies only to a person, not businesses or other organisations. It usually takes place when debts held by a person can no longer be paid and involves the stripping from that person of any assets they may possess. Bankruptcy also imposes a number of limitations on those involved in the process, including not being able to become a company director and a negative impact on credit ratings.
A creditor is any person or organisation that is owed money or has other entities in debt to it. Strictly speaking, no money has to have been leant to become a creditor, as the term can also apply to someone that will be owed money in the future due to one agreement or another.
A CVA (Company Voluntary Agreement) is an agreement made between a business and their creditors when it is believed that the company actually has a future and could go on to succeed. It usually involves finding a compromise between the two parties in which a percentage of the sum owed to the creditors is repaid over a designated period of time, allowing the directors to retain control of their company and operating as per usual.
By Phil Smith