Navigating the daunting world of bankruptcy terms

Filing for bankruptcy is the last thing any business or enterprise wants to face. Sadly for many UK businesses, this is a common reality. The most recent insolvency reports mark a 9.7% increase in company liquidations in Q4 2018. This equates to 14,269 companies going bankrupt – the highest yearly total we have seen in the last five years.

Navigating the decision to go bankrupt is difficult at the best of times and isn’t helped by confusing and inaccessible language to those not in the industry.

Rather than listing these useful terms from A to Z, we’ve put them into two clear categories: processes and orders. A little organisation goes a long way in achieving clarity and understanding the complexities of bankruptcy.

Common processes explained

Insolvency

Insolvency happens when companies or individuals’ financial obligations outweigh their assets. People often get confused between this process and bankruptcy.

Bankruptcy

 

Insolvency becomes bankruptcy when courts decide they are insolvent and unable to pay off their debts. Once declared, the legal process of clearing debts a company or individual cannot afford to pay begins. These debts must be over £5,000.

Liquidation

Liquidation is the process where a company’s or individual’s assets are turned into cash to pay off creditors. This can include property, supplies, and stocks. It can be done in three ways:

  • Creditors Voluntary Liquidation – Directors of a company seek out a liquidator because their business is simply not viable as creditors are threatening legal action.
  • Compulsory Liquidation – When the creditors of the company have lost all patience trying to collect the debt and have followed correct procedure, they issue a winding-up petition. If this is granted in court, liquidation will be forced onto the company to try and repay creditors.
  • Members Voluntary Liquidation – Rather than the directors initiating a liquidator, the shareholders or members will. All company assets are accounted for and any company liabilities are paid off. After this is completed. a capital distribution will be paid to shareholders.

 

Administration

Once the legal process of bankruptcy begins, a company is taken under the management of an administrator. An administrator must be a licensed insolvency practitioner and appointed by the court, creditors, or company directors.

 

Common orders or petitions explained

Statutory demand

This order is given by creditors before a winding-up petition. It is a formal notice that demands repayment of a debt over £750 within 21 days.

Winding-up petition

Once a company or individual have gone over the 21 days without repayment, the creditor will issue a petition to the court. The purpose of this petition is to seek an order that puts the company who owes them money into compulsory liquidation.

If the petition is granted, a winding-up order is given by the court to the company. This puts the company in compulsory liquidation.

Charging order

Creditors request that the court issues a charging order against a company’s or individual’s assets. This order secures the debt against the asset in case the debtor should subsequently decide to enter an individual voluntary arrangement or declare bankruptcy.

Interim order

Before a charging order is issued, a debtor will usually issue an interim order to give them time to challenge the debt or to reach an agreement with the creditor in relation to discharging the debt. An interim order gives them 28 days to reach such an agreement.

Navigating insolvency terminology is not easy. Seek out professionals that offer comprehensive legal and financial advice to figure out the next steps in the insolvency process.

If you get into financial difficulties, Irwin Insolvency is here to support you with a blend of extensive commercial expertise and a touch of realism. If you are seeking insolvency advice, get in touch with us as soon as possible on 0800 009 3173.

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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency, rescue and turnaround.