Insolvency – Glossary of terms
The administration regime is governed by The Insolvency Act 1986, as amended by the Enterprise Act 2002.
An “administrator” can be appointed without petitioning the court by the holder of a qualifying floating charge (created since 15 September 2003), by the company or by its directors. Administration is also available to Limited Liability Partnerships and on rare occasions partnerships governed by the Partnership Act 1895 (traditional partnerships).
Other creditors must petition the court to appoint an administrator.
The administrator must act in the interests of all the creditors and attempt to rescue the company as a going concern.
If this proves impossible he or she must work to maximise the recovery of the creditors as a whole. Only then may the administrator attempt to realise property in favour of one or more secured creditor.
A firm is usually in administration for no more than 12 months, after which an extension from creditors or the court can be applied for. If no action is taken to extend the administration or to place the firm into another insolvency process, then the administration will automatically conclude after 12 months with control of the firm being handed back to those formerly in control.
Only a licensed Insolvency Practitioner can act as an administrator under the administration regime governed by The Insolvency Act 1986 (as amended).
An administrator is an officer of the court and an agent of the company and is not personally liable for any contracts she or he makes on behalf of the firm in administration.
The administrator has the power to do anything necessary or expedient for the management of the affairs, business and property of the firm in administration.
A covenant is a condition in a loan that requires the borrower to fulfill certain conditions, or, which forbids the borrower from undertaking certain actions, or, which possibly restricts certain activities to circumstances when other conditions are met.
Typically, violation of a covenant may result in a default on the loan being declared and penalties being applied.
Common examples include loan to value ratios and profitability ratios and absolutes.
A creditor is a party (e.g. person, organization, company, or government) that has a claim for money or monies worth against a second party.
A debenture is a debt instrument issued by a company to borrow money. A debenture is normally secured by way of fixed and floating charges.
When a company or individual fails to meet the legal obligations (or conditions) of a loan, it is in default. When a loan is in default, the lender is entitled to use the powers provided to it in the loan agreement and / or debenture in order to recover the loan.
This may include the appointment of an insolvency practitioner as an administrator or an agent as a receiver.
A notice issued to a borrower by a lender stating that the terms of the borrowing/lending are in default and why.
The default notice will often make a demand for the whole of the loan be repaid immediately and, in the circumstances that it is not, that the lender will use the powers available to it to recover the loan, which commonly include:
- Appointing a Law of Property Act Receiver;
- Appointing a Fixed Charge Receiver; and
- Appointing an Administrator.
A going concern is a business that functions without the threat of liquidation for the foreseeable future, usually regarded as at least within 12 months.
A fixed charge is a charge or mortgage secured on particular property, e.g. land and buildings, a ship, piece of machinery, shares, intellectual property such as copyrights, patents, trade-marks, etc.
Fixed charges can be granted by both companies and individuals.
Fixed Charge Receiver
A receiver may be appointed by virtue of an express power of appointment contained in a mortgage deed or debenture.
The correct term for such a receiver is a fixed charge receiver although they are often mistakenly referred to as LPA receivers.
Fixed charge receivers are able to exercise the powers provided to them within the debenture or mortgage deed, which normally surpass the powers available naturally to Law of Property Act receivers. A fixed charge receiver does not have to be a licenced Insolvency Practitioner.
A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership, which ‘floats’ until the point at which it is converted into a fixed charge (usually the date when a formal insolvency process begins), at which point the charge attaches to the specific assets of the firm that exist at the time of conversion.
In the UK, only a licensed Insolvency Practitioner (often referred to as an IP) can be appointed in relation to formal insolvency procedures for individuals and businesses.
Insolvency Practitioners are licensed to advise on, and undertake appointments in, all formal insolvency procedures.
Insolvency Practitioners are subject to oversight and inspection by their recognised professional body. Insolvency is a regulated profession under The Insolvency Act 1986 (as amended).
Law of Property Act Receiver
The Law of Property Act 1925 gives the holder of any mortgage or fixed charge an incidental power to sell the secured property once the power became exercisable. The criteria for a lender to appoint are:
- the mortgagee has served a notice requiring payment of the mortgage on the mortgagor, or at least one joint mortgagor, and no payment has been made for three months after service, or
- some interest under the mortgage is in arrears and unpaid for two months after becoming due, or
- there has been a breach of a provision of the mortgage deed or the Law of Property Act by the mortgagor, or some person concurring in the making of the mortgage, other than the payment of the mortgage money or interest thereon
A Law of Property Act receiver has very limited powers and, although an application can be made to court to widen those powers, secured lenders normally appoint fixed charge receivers instead (whom are often colloquially called Law of Property Act receivers).
A Law of Property Act Receiver does not need to be a licensed Insolvency Practitioner. The Law of Property Act 1925 does not apply to Scotland.
Liquidation is the process by which a company (or certain other entity) is brought to an end and the assets and property of the company redistributed.
Liquidation is known as a terminal insolvency procedure. It is governed by The Insolvency Act 1986 (as amended) and, accordingly, only a licensed Insolvency Practitioner can act as a liquidator.
A liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets of the company and settling all claims against the company before putting the company into dissolution.
Loan to Value
The loan to value ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased by a borrower.
A mortgage loan, also referred to as a mortgage, is used by purchasers of real property to raise money to buy the property to be purchased or by existing property owners to raise funds for any purpose. The loan is “secured” on the borrower’s property.
A legally binding promise given by an individual to ensure that a third party fulfils its obligations and/or a promise to fulfil those obligations in place of a third party if that third party fails to do so.
Qualifying Floating Charge
A qualifying floating charge is a floating charge which enables the holder to appoint an administrator under the Insolvency Act 1986 (as amended) without the need for an order of the court.
In brief, a floating charge will be qualifying if it covers the whole, or substantially the whole, of the assets of a company and it was created on or after 5 September 2003.
A lender that has the benefit of a security interest over some or all of the assets of the borrower is secured.
The holder of security is typically entitled to the payment of capital and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information.
Typical security includes fixed charges, floating charges. Quasi-security may include indemnities, undertakings and personal guarantees.
Thanks to Joe Edwards from Charles Russell Speechlys and Jason Brookbanks from HW Fisher for the insolvency information