Thursday, 14 August 2008

UK corporate insolvency jargon: guide / briefing for journalists etc

Administration, winding up, receivership... they're not the same thing. In the current "credit crunch" climate there's lots in the media about companies going bust, sadly. But there's going bust - and there's going bust.

Some journalists seem to constantly mix things up, use the wrong terms, etc, sometimes even in the same sentence - which irritates me almost as much as people pronouncing "Beijing" (and other Chinese words) as if it were French. In this case it's probably not their fault, the poor dears; I suspect many of them have never been briefed properly.

So for a change, instead of trying to demystify technology I'm going to try to demystify bits of insolvency jargon. As it applies to UK companies only, which is big enough a task! (No cross-border stuff, no non-companies, just corporate insolvency.) If you know any mainstream business journalists who might be interested, please point them to this post.


Bankruptcy is only for humans - individuals, people. When an individual officially becomes bankrupt, a trustee in bankruptcy is appointed to realise (sell off) their assets and pay off their debts. In the UK companies can't go "bankrupt", though of course we do informally say "This is gonna bankrupt company X", or "Company X has gone bankrupt".

Outside the UK, companies can officially go bankrupt, depending on where - e.g. in the USA.

And the rules on insolvencies can be different for different types of entities depending on whether they're individuals, companies, partnerships, limited partnerships, limited liability partnerships (LLPs) etc. And that's just for entities set up in the UK, never mind elsewhere! I'm not even going to try to mention anything except companies.


Winding up = liquidation. Those terms you can interchange, at least in the UK.

Winding up is pretty much the end of the line for a company, whether or not it's bust (note that a perfectly solvent company could be wound up e.g. because it's served its purpose). The company winds down, or gets wound up, same difference - it stops trading, its assets are collected in and sold, and its creditors are paid - maybe in full, or more likely they'll only get a percentage of what they were owed if the assets weren't enough to cover all the company's debts in full.

All this is done by a liquidator appointed especially for the task, who's entitled to charge fees for their work and recover expenses from the asset sale proceeds before the creditors are paid their shares. Creditors put in their claims or "proofs of debt" to the liquidator, who decides whether or not to admit the claims as valid and eligible for a share.The "pari passu" principle means that unsecured creditors get paid in proportion to the size of the debts owed to them - so if there's a payment or "dividend" of 1p in the pound, then someone who's owed £1 gets 1p, someone owed £8 gets 8p, someone owed £10 gets 10p and so on. (In the UK only licensed "insolvency practitioners" or "IPs" can be appointed as liquidators. Yes, that means taking exams, having suitable experience, no convictions or discreditable behaviour etc. Most IPs in the UK are accountants, though there are a few IPs who are lawyers.)

Notice that I said unsecured creditors only get a share, pro rata to their proved and admitted claims, of what's available for distribution to creditors generally. Secured creditors should do much better. If a creditor has taken security from the debtor over a particular asset (e.g. a building owned by the company), the most commonly known form being a mortgage or charge, then the creditor basically has first dibs to that property or asset. It can control its realisation: take "possession" of it, sell the asset as mortgagee, or appoint a "receiver" to collect income (e.g. rent payable by tenants of the building), manage it and/or help sell it, and use the income/proceeds to pay itself off and also meet the expenses of sale and the receiver's fees etc. (And if the net sale proceeds are still not enough to meet the debt owed to the secured creditor, it can "prove" i.e. claim against the debtor for what's still owing, but on an unsecured basis only - it has to take its place in the queue along with the unsecured creditors for the balance.)

If there's anything left after all liquidation expenses are met and all the creditors are paid out in full, the surplus money will be divvied up amongst the company's shareholders, and the company is then dissolved, it is an ex-company, it is no more, it's a dead company, it ceases to exist, etc etc. (Unlike with people, who fortunately don't get dissolved or killed off after their bankruptcy creditors are paid off. Most of the time, anyway.)

There's 2 types of liquidation - voluntary and compulsory. Compulsory winding up is the type initiated by a winding up petition made to the court, e.g. an unpaid creditor; the court hears the petition and decides whether or not to make a winding up order, and if it does a liquidator is appointed. A voluntary liquidation is, wouldja believe, initiated voluntarily by the company itself (or its directors or shareholders).

What's a provisional liquidator? A liquidator who's appointed by the court before the winding up petition is heard, normally only in an emergency situation e.g. massive fraud on the part of the company, danger of assets being spirited away etc - because normally there's a time gap between the petition and the actual hearing.


Only a secured creditor can appoint a receiver. No secured creditor, no receivership. A company could theoretically be in liquidation and receivership at the same time - remember, the receiver only has control of the assets over which they were appointed (and over which the company gave security - a debtor doesn't need to give security over all its property, it can be selective about it, though some banks may not be willing to lend to some companies unless they give the bank security over everything lock stock and barrel so in practice if they need to borrow money some companies may have no choice about it).

Ah, you'll say, but what about "administrative receivers"? Who they? What's the diff? Administrative receivers are a particular kind of receiver but they're now an increasingly rare breed. A creditor who has security over the whole (or substantially the whole) of a company's assets including what's known as a floating charge (typically under what's called a "debenture" or "mortgage debenture"), is able to appoint an administrative receiver who has wide powers to run the company's business and sell its assets and ultimately hopefully pay off the appointing creditor. (The Wikipedia article on administrative receivers isn't quite right on who / how the appointment can be made.)

However, an admin receiver can now be appointed only in very few situations (cut down by the Enterprise Act 2002 which introduced administration, covered below), so you'll only hear of them in relation to companies which gave the appropriate kind of security before 15 September 2003, or in one of those exceptional cases (like the "capital markets exception" aka "capital markets exemption"). Again, only IPs can act as administrative receivers.

A "fixed charge receiver" or "LPA receiver" is just a receiver who's not an admin receiver - i.e. a receiver who's been appointed over limited specific assets of the company (rather than all the company's business and assets). They don't have to be licensed IPs, e.g. surveyors often act as receivers of land / buildings.

What are "official receivers" then? Just to confuse matters, they're nothing to do with secured creditors. They're civil servants. Think of them a bit like public defenders for people accused of crimes in the US - they're appointed to act as liquidator or trustee in bankruptcy for debtors who basically can't afford an insolvency practitioner of their own, i.e. for relatively low value estates.


Now on to administration. This insolvency procedure was introduced in the UK to try to promote a culture of rescuing companies to get them back on their feet and preserve jobs rather than, to put it at its most extreme, selling off companies' assets at very low fire sale prices and then just closing it all down (including letting employees go).

The key point is that when a company goes into administration it gains a breathing space - it can keep on trading but there's what's known as a moratorium; creditors are banned from taking certain actions against it e.g. to petition for its winding up, repossess assets (including assets on HP), sell mortgaged property, send in bailiffs, etc (unlike in a liquidation, when mortgagees remain free to enforce their security). So companies can go into administration to get some protection from their creditors.

This gives the company time, with less firefighting of creditors etc to do, to work on a way for it to get out of its troubles with a clean slate, e.g. via a CVA (see below). Or maybe an administration, because of the ban on actions against the company, will enable its assets to be sold for better prices than if it went into liquidation, which would be better for its creditors. There's only a limited number of purposes for which a company can go into administration, in a certain pecking order - first and foremost of which is trying to rescue or salvage the company.

When a company goes into administration an administrator is appointed to run its business and to try to achieve the purposes of the administration and, again, the administrator has to be a qualified IP.

(The Wikipedia article on administration is by the way similarly wrong, or rather not 100% complete, on the appointment of an administrator.)

A secured creditor can block the appointment of an administrator by appointing an administrative receiver, but as mentioned above it's rare that an admin receiver can be appointed these days.

Company voluntary arrangements or CVAs

If a company enters into a CVA, it agrees some kind of arrangement or compromise with its creditors - typically, whereby they'll agree to accept less than the full amount due to them to settle the company's debts, with no further comeback against the company in future.

A couple of key points with CVAs. First, if at least 75% in value of eligible creditors vote in favour of the proposed CVA, all the creditors are stuck with it and have to take less than what's owed to them in full settlement (or whatever terms the CVA provides for) - even the creditors who voted against the proposals. This is sometimes known as a "cram down" of the creditors.

Second, CVAs are very rarely used - unless they're e.g. preceded by an administration (which you'll recall helps temporarily gives the company a moratorium), because companies in CVAs don't get any protection from creditors and are often discriminated against by suppliers and others. (A company qualifying as a "small company" can get a moratorium when proposing a CVA, but I'm not going to go into the small companies moratorium - please see the link below.)

The IP who is appointed to oversee the implementation of a CVA, pay money out under it etc, is known as a "supervisor" (and before a proposed CVA is approved by the required 75% of creditors, the future supervisor is known as a "nominee").

(There's no such thing as a "corporate voluntary arrangement" by the way, officially - that's just a mistaken reference, or let's call it slang, or one kind of popular usage. The correct term is "company voluntary arrangement".)

Schemes of arrangement

Schemes of arrangement are another way for a company to come to an arrangement with creditors and shareholders, with different classes each voting separately.

A company doesn't have to be insolvent to enter into a scheme of arrangement, it may just use one as the most efficient and cost-effective way to restructure, reconstruct or reorganise itself and its businesss / affairs. This kind of scheme has been quite popular e.g. with insurance companies.

Schemes of arrangement used to be known as section 425 schemes, but should now strictly be called section 895 schemes (under section 895 of the Companies Act 2006, which since April 2008 replaced section 425 of the Companies Act 1985).

Workouts, restructurings, rescues etc

A company, if it has only a few big creditors (e.g. banks), may be able to work something out with them without having to undergo a formal insolvency procedure, whereby the banks may agree to give it more time to pay - e.g. a rescheduling of payments (typically postponing payment of principal, reducing interest payments for a period or not paying interest altogether for a time, etc) while the company tries to trade out of its difficulties - or the banks might agree to swap their debt for equity (shares in the company), even lend more money to the company, etc.

The exact details of a workout or restructuring will vary with the situation of the company and its creditors - they will come to a private agreement amongst themselves. But the creditors may decide that agreeing to a work-out to try and help rescue the company is better for them than letting the company go down completely, as they may have more chance of getting more of their money back ultimately via a workout than in a liquidation, administration or receivership.

Some workouts work out, some don't; there have been situations where a workout has failed and the company then has to go into liquidation or administration.

International and cross border issues

I emphasise again that I'm not even going to try to explain any cross border stuff. With non-UK companies, and especially if international groups of companies that operate globally are involved, things can get very complicated and messy indeed. F'rinstance:
  • It's possible for non-UK companies to be subject to UK insolvency proceedings, e.g. if they have assets or creditors here, or foreign courts ask the UK courts for assistance in a foreign insolvency.

  • There are special rules depending on whether companies do or don't have their COMI or "centre of main interests" in the UK or elsewhere in the European Union (which the UK is part of, of course) - again, even if they're not UK (or indeed EU) companies (that's under the EU Insolvency Regulation aka Insolvency Proceedings Regulation Council Regulation (EC) No.1346/2000 if you must know...).

  • Companies can go bust elsewhere and if they're subject to insolvency procedures in a country outside the UK, the foreign IP equivalent may be able to apply for recognition in the UK and even get UK assets sent out of the UK to the other country (as the UK has adopted the UNCITRAL Model Law on Cross Border Insolvency - the USA have too, as Chapter 15, but don't assume that works similarly, nor that COMI under UNCITRAL is the same as COMI under the EUIR!).

And now...

Right, I hope that's all a bit clearer.

From now on, anyone who uses "administration", "receivership" and "liquidation" interchangeably should be reported to me for a very painful spanking (while being made to say "Beijing" with an English "j" one hundred times, just because)!

PS. very funny but telling items on the origins of the current credit crunch, if you've not seen them yet: sub-prime primer (cartoons), and what caused the subprime crisis.

Further information

See the UK Insolvency Service's publications:
Also see Companies House's Liquidation & Insolvency FAQs.


This post is only meant to provide very general information on the position in the UK, and it's just a canter through a very complex area - it's nowhere near what you'd call comprehensive.

Nothing in this post is intended to be insolvency, accounting, financial or legal advice. If you need specific advice, everyone's individual situation is different and you ought to consult a suitably-qualified insolvency practitioner or insolvency lawyer.


abdul said...

Very nicely explained friend..


Anonymous said...

Perfect explanation. Much better in terms of accurancy than Wiki. Thank you.