Guide - A – Z of insolvency terms
An asset is any property of value owned by a person or business. Assets can be both tangible and intangible, and both contribute towards the value of a business. While tangible assets include things like property, vehicles, shares and money in the bank, intangible assets include things like customer lists, licences and distribution agreements, a well-trained workforce and intellectual property, such as patents and copyrights.
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 Arrangement) 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.
It is generally accepted that directors are those in the position of running and managing a company. They are ultimately responsible for the actions of a business, though limited liability laws ensure that they aren’t personally held responsible if a company fails, as long as they have acted professionally and correctly during their tenure.
Fraudulent trading takes place when a business or individual continues to trade without having any means of repaying their debts and with the full intention of defrauding investors and creditors. It is important to distinguish between fraudulent trading and insider trading, with the latter relating to trading based upon the abuse of inside information concerning the financial markets.
HMRC (Her Majesty’s Revenue & Customs) are the branch of the government that regulates and controls the collection of taxes, customs and duties. These include VAT payments and Pay-As-You-Earn (PAYE) tax amongst others. HMRC will often play a significant role in insolvency procedures and it is important to understand exactly what effect they have on 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. Much of the focus in insolvency procedures now lies with restructuring, as opposed to liquidation in the past, and aims to help businesses continue and go on to succeed.
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.
The personal guarantee is a letter written by an individual detailing the conditions of the payment, and guaranteeing that payment, of money lent to another third party. This guarantee then operates as a means of the lender regaining some or all of the money lent in the case of the third party defaulting on their debts.
A preferential creditor is a creditor that is seen to have preferential rights, or a priority, in receiving payments when a debtor is declared insolvent. Preferential creditors usually take the form of occupational pension schemes and employees, though they are by no means limited to these two obligations.
A trustee is someone appointed to take control of an individual or company’s assets when they are declared insolvent. Known as the Trustee in Bankruptcy, the position is usually filled by either the Official Receiver or an Insolvency Practitioner. Their main role is to manage and sell any assets in order that they may then share the proceeds between creditors.
Winding up order
A winding up order is an order from a court, most often on the basis of information provided by a creditor, to begin the compulsory process of liquidating a company. Winding up a company will prevent the business from any further trading and spells the end for most companies or partnerships.
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