Definitions of financial terms
Make sure you understand all the terms used in financial contracts with these easy plain English definitions of the most commonly used terms in finance contracts and other financial related documents:
Bankruptcy - the formal recognition that a person cannot pay their debts as they are due. Note this only applies to individuals. Companies and partnerships that become insolvent are wound up.
Damages - money paid as the normal remedy in the law as compensation for an individual or company's loss. If another type of remedy is wanted, such as an injunction, but cannot be or is not given by the court, then damages will be awarded instead.
Debenture - a formal debt agreement. It refers to both the agreement and the document that verifies it. It is usually issued by companies and is generally supported by security over some property of the debtor. If the debtor defaults, the creditor can take and sell the property. Debentures are often transferable, so the creditor can sell it and there are markets on formal stock exchanges that deal in types of debenture. It is sometimes referred to as debenture stock. A mortgage is a type of debenture but one that is always secured, usually against land.
Floating charge - a form of security for a debt. Instead of naming a specific property, which can be taken by the creditor if the debtor defaults, as in a fixed charge like a mortgage, a class of goods or assets is named, such as the debtor's stock. This allows the debtor to trade in the assets freely, but if the debtor fails to make repayments then the floating charge becomes a fixed charge (known as crystallisation) over all the stock at that time. The creditor can then take and sell it to recover the debt.
Guarantee - a secondary agreement by which one person promises to honour the debt of another if that debtor fails to pay. Banks and other creditors often call on directors of small companies to give their personal guarantees for company debts. A guarantee must be in writing. The guarantor can only be sued if the actual debtor can't pay, in contrast to indemnity.
Indemnity - a promise by a third party to pay a debt owed, or repay a loss caused, by another party. Unlike a guarantee, the person owed can get the money direct from the indemnifier without having to chase the debtor first. Insurance contracts are contracts of indemnity - the insurance company pays first, and then tries to recover the loss from whoever caused it.
Insolvency - the situation where a person or business cannot pay its debts as they fall due. See bankruptcy, liquidation and receivership.
Liquidation - the formal breaking up of a company or partnership by realising, or selling or transferring to pay a debt, the assets of the business. This usually happens when the business is insolvent, but a solvent business can be liquidated if it no longer wishes to continue trading for whatever reason (see receivership).
Receivership - the appointment of a licensed insolvency practitioner to take over the running of a company. A creditor with a secured debt appoints the receiver. The job of the receiver is to recover the debt either by taking the security and selling it or by running the business as a going concern until the debt is paid off (see liquidation).
Redemption of shares - where a company issues shares on terms stating that they can be bought back by the company. Not all shares can be redeemed, only those stated to be redeemable when they were issued. The payment for the shares must generally come from reserves of profit so that the capital of the company is preserved.
Remedy/Remedies - payments or actions ordered by the court as settlement of a dispute. The most common is damages - a payment of money. Others include specific performance of an action required in the contract, injunction and rescission (putting things back to how they were before the contract was signed).
Stamp duty - a tax on transactions. Only applied to specific types of transactions, eg dealings in land and buildings, shares and ships.
Wound up - winding up is the formal procedure for disbanding (closing down) a company.
Based on an article by BusinessLink
Definitions of financial terms
Make sure you understand all the terms used in financial contracts with these easy plain English definitions of the most commonly used terms in finance contracts and other financial related documents:
Bankruptcy - the formal recognition that a person cannot pay their debts as they are due. Note this only applies to individuals. Companies and partnerships that become insolvent are wound up.
Damages - money paid as the normal remedy in the law as compensation for an individual or company's loss. If another type of remedy is wanted, such as an injunction, but cannot be or is not given by the court, then damages will be awarded instead.
Debenture - a formal debt agreement. It refers to both the agreement and the document that verifies it. It is usually issued by companies and is generally supported by security over some property of the debtor. If the debtor defaults, the creditor can take and sell the property. Debentures are often transferable, so the creditor can sell it and there are markets on formal stock exchanges that deal in types of debenture. It is sometimes referred to as debenture stock. A mortgage is a type of debenture but one that is always secured, usually against land.
Floating charge - a form of security for a debt. Instead of naming a specific property, which can be taken by the creditor if the debtor defaults, as in a fixed charge like a mortgage, a class of goods or assets is named, such as the debtor's stock. This allows the debtor to trade in the assets freely, but if the debtor fails to make repayments then the floating charge becomes a fixed charge (known as crystallisation) over all the stock at that time. The creditor can then take and sell it to recover the debt.
Guarantee - a secondary agreement by which one person promises to honour the debt of another if that debtor fails to pay. Banks and other creditors often call on directors of small companies to give their personal guarantees for company debts. A guarantee must be in writing. The guarantor can only be sued if the actual debtor can't pay, in contrast to indemnity.
Indemnity - a promise by a third party to pay a debt owed, or repay a loss caused, by another party. Unlike a guarantee, the person owed can get the money direct from the indemnifier without having to chase the debtor first. Insurance contracts are contracts of indemnity - the insurance company pays first, and then tries to recover the loss from whoever caused it.
Insolvency - the situation where a person or business cannot pay its debts as they fall due. See bankruptcy, liquidation and receivership.
Liquidation - the formal breaking up of a company or partnership by realising, or selling or transferring to pay a debt, the assets of the business. This usually happens when the business is insolvent, but a solvent business can be liquidated if it no longer wishes to continue trading for whatever reason (see receivership).
Receivership - the appointment of a licensed insolvency practitioner to take over the running of a company. A creditor with a secured debt appoints the receiver. The job of the receiver is to recover the debt either by taking the security and selling it or by running the business as a going concern until the debt is paid off (see liquidation).
Redemption of shares - where a company issues shares on terms stating that they can be bought back by the company. Not all shares can be redeemed, only those stated to be redeemable when they were issued. The payment for the shares must generally come from reserves of profit so that the capital of the company is preserved.
Remedy/Remedies - payments or actions ordered by the court as settlement of a dispute. The most common is damages - a payment of money. Others include specific performance of an action required in the contract, injunction and rescission (putting things back to how they were before the contract was signed).
Stamp duty - a tax on transactions. Only applied to specific types of transactions, eg dealings in land and buildings, shares and ships.
Wound up - winding up is the formal procedure for disbanding (closing down) a company.
Based on an article by BusinessLink