With plenty of news reports talking about companies going into administration, you’d be forgiven for thinking that administrations are the most common form of insolvency, when in fact they account for less than 1% of annual insolvencies in Scotland. News reports will often say a company has gone into administration but then refer to the liquidator. Similarly in personal insolvency cases, people often refer to Individual Voluntary Arrangements (IVAs), when they really mean Trust Deeds. All of this indicates there is some confusion over the various insolvency processes.
Here is a brief, simplified glossary of terms used in insolvency that will hopefully clarify some of the confusion.
Debtor: A person who owes money to another individual or organisation.
Creditor: A person, or organisation, that is owed money.
Bankruptcy: (Known as sequestration in Scotland) is a legal declaration that someone cannot pay their debts as they fall due. The estate of an individual or partnership declared bankrupt, passes to a Trustee who realises assets, and / or seeks a contribution from income, to pay money owed to creditors.
Protected Trust Deed (PTD): A form of insolvency that transfers a debtor’s estate to a Trustee to be realised for the benefit of creditors. To become Protected, that is where creditors cannot pursue any unpaid debt at a later date, creditors must agree to the terms of the Trust Deed at the outset. This is often, incorrectly referred to as an IVA (Individual Voluntary Arrangement). IVAs are a similar procedure that are only available in England and Wales.
Debt Arrangement Scheme (DAS): A Scottish Government debt management tool which allows debtors to repay their debts in full over a period agreed with their creditors. Business DASs must be completed in no more than 5 years.
Insolvency Practitioner: An individual licensed and authorised to act as a Trustee, Liquidator and Receiver.
Trustee: A person who administers a bankruptcy or trust deed. In sequestrations, a Trustee can be either the Accountant in Bankruptcy or an Insolvency Practitioner. In Trust Deeds, Trustees must be an Insolvency Practitioner.
Accountant in Bankruptcy: The Scottish Government agency responsible for monitoring personal insolvency in Scotland. They also collate corporate insolvency statistics.
Liquidation (Creditors’ Voluntary / Court): A process that a corporate entity enters when it cannot meet its liabilities as they fall due. The company or its creditors can seek to place the company in Liquidation. A Liquidator is appointed to realise the assets and distribute the proceeds to creditors.
Members’ Voluntary Liquidation: A process where the shareholders of a solvent company appoint a liquidator to wind up the company and distribute surplus assets/funds to the shareholders. Solvent means that all creditors get paid in full with some money left over for the shareholders.
Administration: A process aimed to rescue an ailing company or trade on to achieve a better outcome for creditors than if the company was wound up. The company will be managed by an Administrator who must be an insolvency practitioner.
Receivership: A receiver can be appointed by a lender (usually a bank) where the company has a floating charge which was registered before 2003. The Receiver has a primary duty of care to the floating charge holder. There have only been 4 receiverships in Scotland in the last 2 years
Get in touch
If you receive correspondence regarding a company or individual that has entered an insolvency process, a member of or Business Recovery and Insolvency team will be happy to assist you to assess your position in the case and lodge a claim.