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Debt Glossary

Here is a glossary of useful terms and their definitions…

Bankruptcy

You may decide to file for bankruptcy if you have tried other solutions, like an IVA, but without success.

Bankruptcy is the administration of the affairs of an insolvent individual by a trustee in the interests of his creditors. When a person becomes bankrupt, the control of all his assets, with certain exceptions, passes to the trustee whose job is to sell them and distribute the proceeds to the creditors.

Bankruptcy proceedings start with the making of a Bankruptcy Order by the court. Immediately on the making of the order an official called the Official Receiver (OR) takes over control of the bankrupt’s estate pending the appointment of a trustee. The OR is an officer of the court and a member of the Insolvency Service, an executive agency within the Department of Trade and Industry. Where there are significant assets, an Insolvency Practitioner will usually be appointed to act as trustee, either by a meeting of creditors or by the Secretary of State for Trade and Industry. Where no Insolvency Practitioner is appointed, or where there is a vacancy in the office of trustee, the OR acts as trustee.

An application for a bankruptcy order may be made by any creditor owed more than £750, or by the individual himself. Subject to certain exemptions, once the order is made, control of the bankrupt’s assets passes to the OR and then to the trustee. The bankrupt loses any rights to his property apart from any equipment needed by him for use in his business, and basic domestic equipment such as clothes, bedding and furniture, and certain pension rights.

There are special rules regarding the bankrupt’s home. Generally speaking, if the bankrupt has equity in a house, it may have to be sold. However, the law discourages a trustee from taking steps to force a sale through the court during the first 12 months of the bankruptcy where the bankrupt is married or has young children living with him. The trustee has three years from the date of the bankruptcy order to sell the house or otherwise deal with the bankrupt’s interest in it. If he does not do so within that time, the property will revert to the bankrupt. And if the value of the equity is less than £1,000 the trustee will not be able to sell it at all.

If the bankrupt has surplus income above his needs and those of his dependants, he may be required to make contributions to his creditors for up to three years. The trustee may also claim any property acquired by the bankrupt for as long as the bankrupt remains undischarged from his bankruptcy, such as assets left to him in a will. Such acquisitions will be realised to the benefit of creditors.

During the bankruptcy the bankrupt is subject to certain restrictions. For example he must not obtain credit of more than £500 from anyone without telling that person that he is an undischarged bankrupt, he must not carry on business under a name different from that under which he was declared bankrupt without disclosing the fact that he is an undischarged bankrupt, and he may not act as a company director without the court’s consent. His credit rating will also be affected and some employers will not employ a bankrupt.

The bankrupt will usually be discharged from bankruptcy automatically after one year, or sooner if the OR decides to close his file early. Once discharged, the bankrupt is released from his bankruptcy debts, with some exceptions such as court fines and matrimonial debts. After he has been discharged, the bankrupt does not have any right to take back from the trustee any property that was part of his estate in the bankruptcy, and the trustee will remain in office for as long as is necessary to sell the property and distribute the proceeds to the creditors.

How we can help you with Bankruptcy advice…

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) is a procedure which enables a company to put a proposal to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs. A composition is an agreement under which creditors agree to accept a certain sum of money in settlement of the debts due to them. The procedure is extremely flexible and the form which the voluntary arrangement takes will depend on the terms of the proposal agreed by the creditors. For example, a CVA may involve delayed or reduced payments of debt, capital restructuring or an orderly disposal of assets.

The proposed arrangement requires the approval of at least 75% in value of the creditors, and once approved is legally binding on the company and all its creditors, whether or not they voted in favour of it. There is limited involvement by the court, and the scheme is under the control of a Licensed Insolvency Practitioner acting as a supervisor.

The CVA procedure was introduced by the Insolvency Act 1986 and was designed primarily as a mechanism for business rescue. The procedure is also often used instead of liquidation as a means of distributing funds on the conclusion of (and, occasionally, during) an administration.

A modified CVA may also be applied to insolvent partnerships.

How we can help you with Company Voluntary Arrangements…

Compulsory Liquidation

Compulsory liquidation (or compulsory winding up) is instituted by an order made by the court, usually on the petition of a creditor, the company or a shareholder.

There are a number of possible reasons for making a winding-up order. The most common is because the company is insolvent. Insolvency is usually established by failure to comply with a statutory demand requiring payment within 21 days, or by execution against the company’s goods being returned unsatisfied. A winding-up petition may also be presented by the Secretary of State for Trade and Industry on the grounds of public interest.

In a compulsory liquidation the function of liquidator is in most cases initially performed by an official called the Official Receiver (OR). The OR is an officer of the court and a member of the Insolvency Service, an executive agency within the Department of Trade and Industry. In most compulsory liquidations, the OR becomes liquidator immediately on the making of the winding-up order. Where there are significant assets an Insolvency Practitioner will usually be appointed to act as liquidator in place of the OR, either at a meeting of creditors convened for the purpose or directly by the Secretary of State for Trade and Industry. Where an Insolvency Practitioner is not appointed the OR remains liquidator.

More about Compulsory Liquidations

Creditors’ Voluntary Liquidation (CVL)

A Creditors’ Voluntary Liquidation (CVL) occurs where the shareholders, usually at the directors’ request, decide to put a company into liquidation because it is insolvent (i.e. it cannot pay its debts when they are due).

A CVL is under the effective control of the creditors, who can appoint a liquidator of their choice. The CVL is the most common way for directors and shareholders to deal voluntarily with their company’s insolvency.

More about Creditors’ Voluntary Liquidations

Individual Voluntary Arrangement (IVA)

An individual voluntary arrangement (IVA) is an alternative to bankruptcy. It is a legal process that gives an individual struggling with their debts protection from creditors.

The procedure enables the individual to put a proposal to his creditors for a composition in satisfaction of his debts or a scheme of arrangement of his affairs. A composition is an agreement under which creditors agree to accept a certain sum of money in settlement of the debts due to them. The procedure is extremely flexible and the form which the voluntary arrangement takes will depend on the terms of the proposal agreed by the creditors.

Typically, an IVA lasts for between one to five years, during which time interest on debts is frozen and repayments are made to creditors from the realisation of assets or from contributions made out of earnings. The agreement requires the approval of at least 75% in value of the creditors, and once approved, it is legally binding on the individual and all his creditors, whether or not they voted in favour of it.

A proposal for an IVA may be made by a debtor even if he is already subject to bankruptcy proceedings.

More about Individual Voluntary Arrangements

Licensed Insolvency Practitioners

Insolvency Practitioners are licensed to advise on, and undertake appointments in, all formal insolvency procedures.

Clarke Bell are professional and experienced Licensed Insolvency Practitioners, based in Manchester and working with clients throughout the UK.

Liquidation

Liquidation (or ‘winding up’) is the most common type of corporate insolvency procedure. Liquidation is the formal winding up of a company’s affairs entailing the realisation of its assets and the distribution of the proceeds in a prescribed order of priority. With few exceptions, liquidation is the end of the road for a company and following liquidation it will be removed from the companies register. Liquidation may occur following a receivership or administration.

Liquidation may be either compulsory – when it is instituted by order of the court, or voluntary – when it is instituted by resolution of the shareholders.

Voluntary liquidation is the more common of the two. An insolvent voluntary liquidation is known as a ‘Creditors’ Voluntary Liquidation’ because its conduct is primarily under the control of the creditors.

A solvent voluntary liquidation is known as a ‘Members’ Voluntary Liquidation’ because its conduct is primarily under the control of its members.

More about Liquidations

Liquidator of a company in Compulsory Liquidation

The role of a Liquidator of a company in Compulsory Liquidation is to realise the assets and make payments to creditors.

An Official Receiver (OR) will normally act where the matter is straight forward. (The OR is an officer of the court and a member of the Insolvency Service, an executive agency within the Department of Trade and Industry.)

Where there are significant assets or the matter is complicated, the OR will normally appoint an Insolvency Practitioner (like us) in their place.

Members’ Voluntary Liquidation (MVL)

A solvent liquidation is known as a Members’ Voluntary Liquidation (MVL), in which a liquidator is appointed by the shareholders and the company’s assets are sufficient to settle all its debts with 12 months.

MVLs may be used for purposes of reorganisation, or in the case of owner-managed businesses to enable the shareholders to realise their interest in the company – perhaps to retire or get full-time employment.

More about Members’ Voluntary Liquidations

Trustee in Bankruptcy

A Trustee in Bankruptcy is the person who administers a Bankruptcy. The role of a trustee is to realise the assets and make payments to creditors.

An Official Receiver (OR) will normally act where the matter is straight forward. (The OR is an officer of the court and a member of the Insolvency Service, an executive agency within the Department of Trade and Industry.)

Where there are significant assets or the matter is complicated, the OR will normally appoint an Insolvency Practitioner (like us) in their place.

(Many of these definitions are supplied by the R3 website: www.r3.org.uk/get-advice)

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