Insolvency law is complex, which is why we have put together easy-to-understand definitions of some of the more commonly used terms in insolvency law in order to assist you should you come across a matter of insolvency.
A state of financial distress in which a business or person is unable to pay their debts as and when they fall due. It can lead to insolvency proceedings, in which legal action will be taken against the insolvent person or entity, and assets may be liquidated to pay off outstanding debts.
The legal process relating to the insolvency of a natural person (not a company). This involves the appointment of a trustee to sell and distribute assets among the creditors. The bankrupt's unsecured debts owed at the date of bankruptcy are usually wiped clean but there will be a permanent record of the bankruptcy.
Someone who is owed a debt. A Secured Creditor is someone who holds a security interest over the business or specified assets of a person or a company, which will provide them with priority to secure payment of their debts.
Creditors Voluntary Liquidation (CVL):
Whereby a shareholder resolution (special majority) to appoint a liquidator, as opposed to Court Winding Up – where a creditor applies to Court for a liquidator to be appointed, usually after a creditor's statutory demand for repayment of a debt. A liquidator can investigate and pursue claims and then distribute assets among the creditors. Upon completion of the liquidation, the company will be deregistered.
Voluntary Administration (VA):
When the company director/board resolve (ordinary majority) to appoint an administrator, to control the company with a view to a DOCA or liquidation after a major meeting of creditors.
Deed of Company Arrangement (DOCA):
A deed entered into by the company if approved by creditors during a VA for the purpose of restructuring a viable business so it can return to profitability. This usually involves the payment of a cents-in-the-dollar dividend to creditors, with the control of the company being returned to the directors.
Where a new company acquires an existing business (without paying market value) that has been deliberately liquidated to avoid paying outstanding debts, including taxes, creditors and employee entitlements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.