Glossary of Financial Terms for Businesses
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If a company falls into financial difficulties the directors or a third party will sometimes appoint an Administrator to run the company. This is to determine whether the company can trade out of its problems or be sold on to enable the company to be turned around. If the company is not a viable concern then the assets will be sold and distributed to its creditors.
A person who controls a company which has gone into Administration. The Administrator has overall control of the company and any decision must be taken by the Administrator.
Annulment is another term for cancellation.
This is a term used when a debt has not been paid on time and the payments become overdue. If the debt is not paid then action may be taken to reclaim the money.
Anything that is owned by an individual or company which has a value either now or will have a value at some time in the future. Examples include vehicles, shares, money in the bank or in hand, property and book debts.
This is an option a person may use if they are unable to pay their debts as and when they become due. They would lose control of their assets and would not be allowed to become a company director for the period of bankruptcy. Certain occupations and credit ratings are affected by bankruptcy.
Bankruptcy Restrictions Order
A court order making an individual bankrupt. Bankruptcy Restrictions Order or Undertaking A bankruptcy restriction order or undertaking is where a restriction is made against a bankrupt. This could result in the restrictions of bankruptcy continuing for a period of between 2 and 15 years.
These are monies that are owed to an individual or company for goods supplied or services provided.
These are debts that are in a sole traders or partnerships trading name. For businesses who have the same trading name as their personal name, business debts are those that have been accumulated specifically from the business.
Business Insolvency - Business insolvency can be defined in two different ways:
Cash flow insolvency - Unable to pay debts as they fall due.
Balance sheet insolvency - Having negative net assets in other words, liabilities exceed assets.
A CCJ (county court judgment) is a court action where an individual or company has taken you to court for unpaid debts. The court will order you to pay the debt within a period of time; if you dont then they will be entitled to take further action
This is an order made by the court giving the trustee in bankruptcy a charge on a debtors interest in their home. This will continue after they are discharged from bankruptcy.
A company is a form of business organisation and may be in the form of a sole trader, partnership or limited company.
All limited companies and PLCs are registered here. All information is stored and is available to the public. Companies House also incorporates and dissolves companies.
These are debts that are in the name of the limited company.
A county court is a court based in, or with, a jurisdiction covering one or more counties.
The purpose of the Creditors Meeting is to allow your creditors an opportunity to pass a vote on your proposed Individual Voluntary Arrangement (IVA). When a creditor agrees with the proposed Individual Voluntary Arrangement they will vote in favour of it. If they do not agree with your proposed Individual Voluntary Arrangement they will vote against it.
Banks and financial services use this as a tool. If you were to request a loan from them they would check your credit rating. A good rating may result in them lending more money. A low score may mean a lesser amount is offered or the request refused. The rating is assessed on whether there are any CCJs (county court judgments) or any defaults on paying debts.
This is anybody who is owed money. It can also be someone who will (or may) be owed money in the future due to some obligation that has already been entered into.
Creditors Petition (bankruptcy)
A person can only be made bankrupt if the debt is unsecured and for a fixed sum that they appear unable to pay. Any individual owed more than £750 can petition to make you bankrupt. Bankruptcy can also be petitioned for by a group of people if the combined sum due to them is more than £750. The proceedings will normally take place at your local county court with bankruptcy jurisdiction.
CVA Company Voluntary Arrangement
This route is usually taken by directors who feel their company has a viable future and are willing to work hard to keep it alive. If this route is taken an arrangement is entered into with your creditors to repay a percentage of the sum owed to them over a period of time. Then the directors will keep control of the Company and continue to trade as normal.
CVL Creditors Voluntary Liquidation The Company will stop trading, all contracts will be terminated and assets sold. The shareholders of the company will decide to liquidate the company and will enlist the services of an insolvency practitioner to complete all the necessary arrangements.
Debt Management Plan (DMP)
This is an informal agreement between you and your creditors enabling you to consolidate your unsecured debt. All of your debts can be included in your Debt Management Plan enabling you to repay your debts with ONE regular monthly repayment you can afford.
These are individuals or companies that owe money to a third party for goods or services provided.
Debtors Petition (bankruptcy)
This is where an individual declares themselves bankrupt by visiting their local county court and petitioning for bankruptcy.
These are monies that are owed to an individual or company for goods supplied or services provided.
This is issued by a creditor before the commencement of legal action. It will allow you seven days to pay the amount stated. If this is not settled, then the creditor can take court action.
A director is a person who conducts the affairs of a limited company.
Directors are responsible for the running, management and control of a company. The limited liability of a company ensures directors are protected from personal risk; they must however act professionally and correctly to ensure this protection.
If a person is declared bankrupt or other insolvency offences have been committed and disqualification ensues it is illegal for that person to be the director or manager of a company and may be barred by the DBIS.
A bankrupt usually receives a discharge from bankruptcy automatically, no more than a year after he was made bankrupt. Discharge means he is freed from the disabilities of being a bankrupt.
In order to commence dissolution proceedings the company must not have been trading for at least three months. The company can then be dissolved. This will legally break up a company that no longer wishes to trade.
This is used by landlords as a tool where there is unpaid rent. Where a landlord has agreed a payment plan for rent and this is not adhered to, they have various options and can instruct an agent to enter the property and remove goods or assets to cover the value of the debt. This can usually be carried out within one week of a missed payment. They do not need a court judgment to implement these actions.
DBIS Department for Business, Innovation and Skills
Is a government agency working to create the conditions for business success and help the UK respond to the challenge of globalisation. They promote enterprise innovation and creativity. DBIS run the The Insolvency Service in England and Wales and are the regulatory body for many insolvency practitioners. They also help in many employment issues such as redundancy.
Financial institutions provide this service. Companies receive payment for their unpaid sales invoices and the financial institution assist in the collection of the debts. The factoring company takes a percentage of this debt as a fee.
Fixed and Floating Charge
These are debts which are secured by an asset (usually property). A fixed charge attaches to the asset in question as soon as the charge is created. A floating charge attaches only when it crystallises. Thus with a fixed charge the borrower could not sell the asset without the permission of the lender. A floating charge however is usually secured on things like raw materials or component stocks and therefore the borrower can deal with these stocks in the normal course of business, consuming them and replacing them whenever necessary. Should the charge crystallise, for instance, as a result of a failure to pay interest at the proper time, the stocks which were present at that moment become subject to the charge and the borrower would be unable to make use of them without the permission of the charge holder.
Where trade continues without any means of repaying the debts and with the intention of defrauding creditors. Directors that continue to trade in circumstances risk disqualification or becoming personally liable for the worsened trading postion.
Where a company is trading and making a profit.
HMRC Her Majestys Revenue & Customs
A government department who regulates and collects customs and duties for instance VAT and PAYE.
Income Payment Order
An Income Payment Order is a legally binding agreements that are made after you have met the Official Receiver following bankruptcy. At that meeting your income and outgoings will be looked at and if you have any surplus you will need to pay a proportion of this towards your debts.
Individual Voluntary Arrangement
An Individual Voluntary Arrangement can sometimes be referred to as just a Voluntary Arrangement or simply shortened to IVA. It is a scheme created and endorsed by the government and is a way to repay unsecured debt at an affordable amount per month, with a guarantee from creditors they will cease pursuing you for monies owed.
Insolvency means the inability to pay ones debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.
An insolvency practitioner is usually an accountant or solicitor who has trained and specialised in insolvency. They are authorised by the Secretary of State or other recognised professional bodies such as the ACCA.
This is when a company or individual cannot afford to repay their debts as and when they are due, or whose liabilities are greater than their assets.
If a person is proposing to do an Individual Voluntary Arrangement (IVA) they can apply for an interim order in court. This protects them against any legal action which may be taken against them by anyone they owe money to.
Joint and Several Liability
If one or more person enters into an agreement (such as a mortgage or rent agreement), then all those named on the agreement are liable for the full amount. An example of this would be a joint mortgage where the mortgage company can pursue either or both people named on the mortgage for any amounts outstanding.
A form of security (e.g. a mortgage) to ensure payment of a debt.
Debts and obligations of the company or individual. An example of these would be bank loans, mortgages, credit cards or store cards.
A company with its own legal identity. This ensures the directors and shareholders are not liable for any of the companys actions providing they are legal and proper.
Owners of a company have their liability for the companys debts limited. Their liability is limited to the paid-up value of the shares they own i.e. it is limited to the amount they agreed to pay for the shares when they purchased them.
When a company becomes insolvent, then it ceases to trade as it is not able to pay its debts as and when they fall due. It is then liquidated i.e. its assets are sold and the resulting funds utilised to pay at least some of its debts. If the creditors have been paid in full any remaining funds are passed to the owner.
Is the person, other than the official receiver, responsible for dealing with the winding up of a company.
A mortgage is the transfer of an interest in property (or the equivalent in law – a charge) to a lender as a security for a debt – usually a loan of money.
Monthly payment is the combined principal and interest owed on a loan, paid on a monthly basis. When used in regards of a voluntary arrangement or debt management plan it means the monthly amount you have agreed to pay.
Members Voluntary Liquidation (MVL)
If a company is placed into liquidation when it has sufficient assets to pay all its creditors in full, this is known as a members voluntary liquidation (MVL)
Net assets are sometimes the same as net worth, or assets minus liabilities. The term net assets is commonly used with charities or not- for- profit entities. Although these entities do not make money, it is important to maintain reasonable reserves to help future growth.
This occurs when the value of an asset used to secure a loan is less than the outstanding balance on the loan. When applied to the owner-occupied housing market, a fall in the market value of a house to below its mortgaged amount is the usual cause of negative equity.
In business, net liabilities, sometimes called net worth, are the total assets minus total outside liabilities of an individual or a company.
The Official Receiver is an officer of the court and civil servant employed by The Insolvency Service, who deals with bankruptcies and compulsory liquidation.
A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business.
Contributions are paid and held to build up a fund to pay retirement pensions.
This is a letter written by someone guaranteeing the payment of money lent to a third party (maybe a limited company). If the company defaults on the repayments then the lender will call on the personal guarantee to repay either part or all of the remaining debt.
A public company may offer to sell its shares to the public. A public company must satisfy Companies House that at least £50,000 worth of shares have been issued and that each share has been paid up to at least one quarter of its face value.
Positive/ Releasable Equity
Applied to the owner-occupied housing market, when the market value is greater than the amount the borrower owes on it is the usual case of positive or releasable equity.
A creditor who is entitled to receive payments prior to unsecured creditors. These include employees and occupational pension schemes.
The voluntary arrangement proposal sets out what is being offered to your creditors and what they can expect to receive after the costs of the voluntary arrangement have been deducted. The exact contents of the proposal will vary upon the individual circumstances.
An individual need not attend a meeting. They can appoint a third party to attend and vote in their place or vote by a postal voting system; a proxy.
Receiver / Receivership
A Receiver is appointed by a lender (usually a bank) with a charge or mortgage over the companys assets. The Receiver then sells the assets of the company in Receivership in order to repay the debt.
Redundancy is a form of dismissal. It could be that the company is down sizing or closing a department or closing the whole company. The staff are then made redundant as there is no longer available employment.
A debt that is secured against an asset or assets.
Own stakes in limited companies. Shares can be purchased on the open market if it is a quoted PLC. They can vote on how a company is run and they earn a share of the profits as a dividend.
Are owners of small businesses with few if any employees.
Statement of Affairs
This is a statement of assets and liabilities of a company at the date of its winding up, Receivership or Administration. It is prepared by the directors with the assistance of a licensed Insolvency Practitioner.
When an individual or company enters into a Voluntary Arrangement a Supervisor of the Arrangement is appointed. The Supervisor ensures that contributions are made as they fall due and kept up to date. Failure to keep the contributions up to date could result in the Supervisor defaulting and failing the Voluntary Arrangement and this could lead to liquidation or bankruptcy.
The Trustee in Bankruptcy is either the Official Receiver or an Insolvency Practitioner and will take control of your assets. The Trustees main objective is to sell these assets and share the proceeds among the creditors.
Is the money a company takes for its services before any expenditure is deducted. It is not the profit of the company.
A creditor who does not hold security against an asset (a mortgage is a secured creditor). Some unsecured creditors may be preferential creditors.
VAT Value Added Tax
Is a duty levied on goods and services which are liable for VAT. If you run a business you will usually have to register for VAT if your taxable turnover exceeds a level set by the Government.
WUP Winding Up Petition
A creditor can apply for a WUP to be heard in court if the debtor does not pay the money due to the creditor. This could lead to the company being wound up compulsorily.
Published - November 2014