Glossary of UK Insolvency Terms

UK insolvency law uses specific terms that mean specific things. Using them interchangeably, or not understanding them at all, leads to bad decisions. This glossary defines every term you are likely to encounter as a UK company director during financial difficulty, insolvency, or liquidation.

This glossary describes the law in England and Wales. Scotland and Northern Ireland have some different rules and terms.

We compiled this list from the questions directors actually ask us. Clarifying the vocabulary at the start of the process saves you hours of misunderstanding later.

Most directors arrive at their first consultation not knowing the difference between insolvency and liquidation, between a CVL and a CVA, or between a fixed charge and a floating charge. These are not academic distinctions. Each one changes what happens to your company, your creditors, and you personally.

If you are going through this process, we believe understanding the vocabulary gives you the ability to follow what your insolvency practitioner is telling you and to make informed decisions rather than nodding along.

UK Insolvency Glossary: Key Terms A-Z

Administration. A formal insolvency process that we see used when creditor pressure on your company is intense. An administrator (a licensed IP) takes control of the company under court protection. An automatic moratorium stops creditors taking enforcement action during administration unless the administrator consents or the court gives permission.

Purpose: rescue the company, achieve a better result for creditors than liquidation, or realise assets for secured and preferential creditors. See alternatives to liquidation.

Balance-sheet test. One of the two statutory insolvency tests under section 123 of the Insolvency Act 1986. Your company fails the balance-sheet test if its total liabilities (including contingent and prospective liabilities) exceed its total assets. Failing either test means the company is insolvent.

Bona vacantia. Latin for “ownerless goods.” When a company is dissolved, any assets that were not realised during liquidation become property of the Crown. The Treasury Solicitor’s Bona Vacantia Division manages these assets. You can apply for restoration of the company to recover bona vacantia assets, but the process is expensive.

Cash-flow test. The other statutory insolvency test. A company fails the cash-flow test if it cannot pay its debts as they fall due. If you are juggling creditors, delaying HMRC, or relying on next month’s revenue to cover this month’s obligations, you are likely failing this test.

Company Voluntary Arrangement (CVA). A binding agreement between the company and its creditors to repay a proportion of the debt, usually over 3-5 years. It cannot affect a secured creditor’s right to enforce its security, or the priority of preferential creditors, without their agreement.

Requires approval by 75% or more by value of the creditors who vote. It fails if more than half by value of the unconnected creditors vote against it. The company continues to trade under director control, supervised by a licensed IP. We find CVAs work when the business is viable but has a specific, identifiable debt problem.

Connected party. A person connected to the company for the purposes of the Insolvency Act. Includes directors, shadow directors, their spouses, family members, and other companies they control. Where a connected party is preferred in the two years before the onset of insolvency, the law presumes the company intended to prefer them, unless the contrary is shown.

Contribution order. A court order under section 214 (wrongful trading) requiring a director to contribute personally to the company’s assets. The amount is based on the increase in the company’s net deficiency between the date you should have stopped trading and the date the company entered liquidation.

Creditors’ Voluntary Liquidation (CVL). The standard route for closing an insolvent company voluntarily. You initiate the process, appoint a liquidator, and the company’s assets are realised and distributed to creditors in the statutory priority order. See our CVL guide.

Declaration of Solvency. A statutory declaration by directors in a Members’ Voluntary Liquidation (MVL) confirming the company can pay all its debts, including interest, within 12 months. Making the declaration without reasonable grounds for that opinion is a criminal offence, punishable by a fine or imprisonment.

Director disqualification. A court order or voluntary undertaking under the Company Directors Disqualification Act 1986 that bans a person from acting as a director, without the court’s permission, for up to 15 years (at least 2 years where the court finds unfit conduct).

Triggered by unfit conduct including wrongful trading, Crown debt accumulation, and persistent late filing. See our disqualification guide.

Dissolution. The removal of a company from the Companies House register. Usually occurs three months after Companies House registers the liquidator’s final account (the court can defer this), or through voluntary strike-off (form DS01). A dissolved company can usually be restored within six years (with no time limit for personal injury claims). See strike-off and dissolution.

Fixed charge. A security interest over a specific, identified asset (typically property or specific equipment). The charge holder has a direct claim over that asset and ranks first in the creditor priority order.

Floating charge. A security interest over a class of assets (typically “all assets not subject to a fixed charge”). The charge “floats” over the assets while the company trades and crystallises into a fixed charge on a trigger event (usually insolvency). Floating charge holders rank after preferential creditors.

Fraudulent trading. Carrying on the business of a company with intent to defraud creditors. It can lead to a civil claim by the liquidator under section 213 of the Insolvency Act, and is a criminal offence under section 993 of the Companies Act 2006. Maximum sentence: 10 years’ imprisonment. See can directors go to prison.

Insolvency. The state of being unable to pay debts. We stress this point: your company is insolvent if it fails either the cash-flow test or the balance-sheet test under section 123 of the Insolvency Act 1986. Insolvency is a financial state, not a legal process. Liquidation, administration, and CVA are legal processes that respond to insolvency.

Insolvency practitioner (IP). A licensed professional authorised to act in formal insolvency proceedings. Must be licensed by one of the recognised professional bodies (IPA, ICAEW or ICAS). Apart from the Official Receiver, liquidators, administrators and CVA supervisors must be licensed IPs.

Liquidation. The formal process of winding up a company: realising its assets, paying creditors in the statutory priority order, and dissolving the company. Can be voluntary (MVL or CVL) or compulsory (court-ordered). See our liquidation guide.

Members’ Voluntary Liquidation (MVL). A liquidation route for solvent companies. Used to close a company and distribute surplus assets to shareholders at capital gains rates. Requires a Declaration of Solvency. See our MVL guide.

Misfeasance. A breach of duty by a director. Under section 212 of the Insolvency Act, the liquidator can bring a misfeasance claim to recover losses caused by a director’s breach of fiduciary duties, including duties of care, skill, and diligence.

Moratorium. A legal freeze on creditor enforcement action. Applies automatically in administration. Also available as a standalone process under Part A1 of the Insolvency Act (introduced by the Corporate Insolvency and Governance Act 2020) for eligible companies seeking time to explore rescue options.

Official Receiver. A civil servant employed by the Insolvency Service who is appointed automatically as liquidator in compulsory liquidations. The Official Receiver has a mandatory duty to investigate the conduct of every director in a compulsory liquidation, including you if your company is wound up by the court.

Preference. A payment or action that puts a creditor in a better position than they would have been in if the company had gone straight into liquidation. The liquidator can ask the court to reverse preferences made in the six months before the onset of insolvency (two years for connected parties) under section 239.

The company must have been insolvent at the time or become insolvent as a result, and must have wanted to put that creditor in a better position.

Preferential creditors. Creditors who rank ahead of floating charge holders and unsecured creditors. Includes employees (up to £800 unpaid wages, plus holiday pay) and HMRC for certain collected taxes (PAYE, employee NICs, VAT) since December 2020.

Prescribed part. A portion of floating charge realisations ring-fenced for unsecured creditors under section 176A: 50% of the first £10,000, plus 20% above that, capped at £800,000 (£600,000 for floating charges created before 6 April 2020). It may not apply to very small estates or where the cost of distribution would be disproportionate.

Proof of debt. A formal claim submitted by a creditor to participate in distributions from the liquidation. Creditors must submit proof of debt to receive any dividend.

Shadow director. A person whose instructions the formally appointed directors are accustomed to follow (section 251, Companies Act 2006). Shadow directors are subject to directors’ general duties so far as those duties can apply to them, and are exposed to wrongful trading and disqualification.

Statement of affairs. A verified document listing every asset, liability, creditor, and security held over the company’s property. Required within 7 days of a CVL resolution, or within 21 days of the Official Receiver’s notice in a compulsory liquidation. Failure to deliver in compulsory liquidation without a reasonable excuse is a criminal offence.

Statutory demand. A formal demand for payment of a debt over £750. If unsatisfied after 21 days, it provides grounds for a winding-up petition.

Transaction at undervalue. A transaction where the company transfers an asset for significantly less than it is worth (section 238). The liquidator can ask the court to reverse such transactions made in the two years before the onset of insolvency.

Winding-up order. A court order placing a company into compulsory liquidation. Made when the court grants a winding-up petition. The Official Receiver is appointed as liquidator from the date of the order.

Winding-up petition. A formal application to the court by a creditor to wind up the company compulsorily. The most common ground is that the company is unable to pay its debts. Once a petition is presented, payments out of the company’s accounts can be made void if a winding-up order follows. Banks usually freeze the accounts when they see the petition advertised in the London Gazette.

Wrongful trading. A civil claim under section 214 of the Insolvency Act. Applies when you knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration, and did not take every step you should have to minimise creditors’ losses. Can result in a court order to contribute personally, not imprisonment. See when to stop trading.

FAQs About UK Insolvency Terminology