Terminology explained

While you hope your business will never get involved in a Company Voluntary Arrangement or be served with a Winding Up Order, these are happening all the time to firms across the UK.

If you do get involved in insolvency actions, it’s important to understand both the options available and the language involved. You should always seek professional advice, and here’s a short guide to help you understand some of the terms they could be using.

Administration – A process which protects a company from its creditors while its finances are restructured. This could include selling off parts of the business. While in this process, the firm is run by an external administrator, not the directors.

Bankruptcy – Companies cannot go bankrupt, but individuals can. This is usually the last resort when debts cannot be paid and a bankrupt has significant limitations placed upon them.

Company Voluntary Arrangement (CVA) – An insolvent firm can go into a CVA with the agreement of its creditors who know they will get a reasonable amount of their money back if trading continues. This mechanism allows a firm to restructure its debts and trade its way back into solvency.

Compulsory Liquidation – A creditor who cannot get payment by any other means may resort to this, first as a threat and then as an action. Once begun, the directors lose control of the business.

Creditors’ Voluntary Liquidation (CVL) – If a company is insolvent and the directors can see no other way out, they may opt for a CVL. Creditors often get little or no money back, and the conduct of the directors is investigated to identify whether they have engaged in wrongful trading.

County Court Judgement (CCJ) – A frequently used process for recovering debts, where a creditor obtains a legal judgement against a business for the money owed to them. Having a CCJ against you will weaken your credit record.

Distraint – A debt recovery process which allows creditors to take ‘walking possession’ of business assets. It’s particularly easy for HMRC to use, and cases have become much more common.

Insolvency – A business is insolvent when it is unable to pay its bills. As soon as directors believe the firm is insolvent, they should seek professional advice.

Pre-Pack Administration – A legal form which allows a company to go into administration with the end result, often a sale of the business, already agreed.

Administrative Receivership – This is usually initiated by a bank with a debenture and the process focuses on getting money back for the secured creditors.

Winding Up Order – Often an action of last resort by an exasperated creditor, it can be initiated by anyone owed over £750. It is commonly used by HMRC to put pressure on firms to pay their tax bill.

Wrongful Trading – This is an offence in the law, and directors can be found guilty if it is shown they knew, or ought to have concluded that, there was no reasonable prospect of avoiding insolvent liquidation, and did not take every step to minimise potential loss to creditors.

Avoid insolvency actions by improving cash flow

If your business is fundamentally sound, but struggling with cash flow, Business Recovery can help you find solutions. Our team of experts has worked with hundreds of firms, showing them how to boost their working capital by releasing value tied up in their assets.

Discuss your situation with our business finance specialists by calling now on 01451 832533. The only cost is a few moments of your time.